sources of finance EWA
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- Created by: Austeja0
- Created on: 23-02-21 17:31
what is a bank loan?
An amount of money borrowed for a set period within an agreed repayment schedule. The repayment amount will depend on the interest rate, size and duration. Medium-term
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Who do banks prefer loaning to?
Businesses with an established track record of profitability as this shows the bank how likely you are able to repay the loan and interest.
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Give 4 advantages of a bank loan
1. The money is guaranteed to the business for a certain period
2. Interest rates may be fixed making it easier to forecast interest payments
3. no need to provide the bank with a share in the business as you are paying interest
4. appropriate way of fi
2. Interest rates may be fixed making it easier to forecast interest payments
3. no need to provide the bank with a share in the business as you are paying interest
4. appropriate way of fi
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Give 3 disadvantages of a bank loan
1. It requires security as the bank gets collateral over the businesses assets.
2. There's lack of flexibility
3. Smaller businesses are often excluded
2. There's lack of flexibility
3. Smaller businesses are often excluded
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What is a retained profit?
When a business makes a net profit and has a decision whether to extract it from the business by way of dividend, or reinvest it by leaving profits in the business. Long-term
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where would you see retained profits in a balance sheet?
In the equity section
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What are the advantages of retained profits?
1. Cheap- opportunity cost for shareholders of leaving profits in the business
2. Flexible- management has complete control
3. do not dilute the ownership of the company
2. Flexible- management has complete control
3. do not dilute the ownership of the company
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what are the disadvantages of retained profit?
1. There's danger of hoarding cash
2. Shareholders may prefer dividends
3. It's a drain on finance if loss-making
2. Shareholders may prefer dividends
3. It's a drain on finance if loss-making
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What is a bank overdraft?
It's provided when businesses make payments from their business current account exceeding the available cash balance. It enables the business to obtain short term funding. Short term.
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advantages of a bank overdraft?
1. Interest- only paid on the amount borrowed under the limit (facilllity)
2. Bank has flexibility to review and adjust the level of the overdraft limit
3. Easy to arrange
2. Bank has flexibility to review and adjust the level of the overdraft limit
3. Easy to arrange
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disadvantages of a bank overdraft?
1. Can be with drawn on short notice.
2. There's a higher interest charge and rate
2. There's a higher interest charge and rate
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What is trade credit?
Amounts owned to suppliers for good and services supplied on credit and not yet paid for. Short term.
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What are the benefits to using trade credit?
1. Free finance- no interest
2. Flexible as business decides when to pay
3. commonly available and expected
4. often significant/popular
2. Flexible as business decides when to pay
3. commonly available and expected
4. often significant/popular
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What are the issues of using trade credit?
1. Wrong to abuse supplier goodwill- delaying to pay
2. costs of non-payment
3. suppliers can commence insolvency proceedings
2. costs of non-payment
3. suppliers can commence insolvency proceedings
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What is debt factoring?
Short-term source. When a business can raise cash by selling their outstanding sales invoices (receivables) to a third party (a factoring company) at a discount.
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What are the benefits of debt factoring?
1. amounts owed by customers are turned into cash quickly
2. Business can focus on selling rather than collecting debts
3. no security required
2. Business can focus on selling rather than collecting debts
3. no security required
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what are the drawbacks to debt factoring?
1. High cost – the charge made by the factoring companies may typically around 3%
2. Customers may feel their relationship with the business has changed
2. Customers may feel their relationship with the business has changed
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What is hire purchase?
A hire purchase is a method of buying good through making instalments payments over time. Medium term.
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what are the benefits of hire purchase?
1. Flexible
2. wide range of assets can be financed using HP
3. Fixed monthly payments
2. wide range of assets can be financed using HP
3. Fixed monthly payments
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What are the drawbacks of hire purchase?
1. If you don't manage to pay on time it can affect your credit score
2. you don't have ownership until your last payment
3. Fear of repossession as the loan is secured to the vehicle,
2. you don't have ownership until your last payment
3. Fear of repossession as the loan is secured to the vehicle,
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What is leasing?
Is a form of renting an asset, giving beneficial use of the asset without owning it. Medium term
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What are the benefits to leasing?
1. Predictable cash flow
2. Asset owner carries the risk
3. Lower interest than a bank loan
4. Less security required
5. Widely available
2. Asset owner carries the risk
3. Lower interest than a bank loan
4. Less security required
5. Widely available
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What are the disadvantages to leasing?
1. More expensive than buying asset outright
2. You don't own the asset
3. There are long term leasing contracts meaning it's difficult to cancel
4. There might be a need for up-front deposit
2. You don't own the asset
3. There are long term leasing contracts meaning it's difficult to cancel
4. There might be a need for up-front deposit
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What is venture capital?
Provides long-term, committed share capital, to help unquoted companies grow and succeed. High risk high rewards.
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What are the benefits of venture capital?
1. Makes expansion possible as banks are not interested in high risk
2. There's no repayment- type of equity finance
3. Reduce personal risks
4. VC firms have expertise
2. There's no repayment- type of equity finance
3. Reduce personal risks
4. VC firms have expertise
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What are the drawbacks of venture capital?
1. Given up a share of business- profits made need to be split up
2. May lose control if more than 50% of share is given up- may lose decision making power
2. May lose control if more than 50% of share is given up- may lose decision making power
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What are retained profits?
Long term.
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Other cards in this set
Card 2
Front
Who do banks prefer loaning to?
Back
Businesses with an established track record of profitability as this shows the bank how likely you are able to repay the loan and interest.
Card 3
Front
Give 4 advantages of a bank loan
Back
Card 4
Front
Give 3 disadvantages of a bank loan
Back
Card 5
Front
What is a retained profit?
Back
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