Sources of Finance

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What needs to be considered when applying for finance?
Purpose of the finance, Amount, Repayment, Interest, Security of assets
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What are the advantages of internal finance?
No interest is paid, no loss of control outside of the business.
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What are the disadvantages of internal finance?
May be insufficient funds to finance project, May conflict with stakeholer wants.
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What are the features of a bank overdraft?
A flexible arrangement to borrow money in the short term to help with cash flow problems. Interest is paid, There is an overdraft limit, Security will be required to safeguard borrowing, Can be repayable on deamand
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What are the advantages of a bank overdraft?
Very flexible a business can borrow and repay whenever it likes. Can be economical to operate as interest is only payable on money borrowed and when it is borrowed.
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What are the disadvantages of a bank overdraft?
Interest can be higher than bank loans, If the business get into further difficukties the bank can ask for it to be repaid immediatly, Security is required such as the owners house.
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What are the features of a bank loan?
Finance provided for a specific purpose, interest is paid, set for a time period, repayment is often regular instalments, Security against an asset is required
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What are the advantages of a bank loan?
Easy to budget for because timing and repayment amount in known, May be flexibility in repayment schedule, Interest rates can be negotiated often at a lower rate than overdrafts.
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What are the disadvantages of a bank loan?
Long term financial committment which will need to be serviced, Security such as the owners house is needed.
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What are the features of a mortgage?
When a property is used as security for borrowing, interest is paid, Set for a time period such as 25 years.
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What are the advantages of a mortgage?
Easy to budget for because timing an repayments are known, Rates are realativly low
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What are the disadvantages of a mortgage?
Long term financial committment, Involves putting down of security.
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What are the features of limited company ordinary shares?
In return for investment regular dividends have to be paid, investors want some control over the company.
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What are the advantages of issuing ordinary shares?
Can potentially raise for finance than a sole trader, can attract new management bringing new expertise, Dividends vary according to profits so shares are less of a burden if profits are lower.
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What are the disadvantages of issuing ordinary shares?
Outside investors will have some control and could be disruptive for existing management, Finance is never paid off because there is always a need to pay dividends, If the company goes bust ordinary shareholders are last to get their money back.
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What are the features of preference shares?
They have a priority over ordinary shares over claim on profit.
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What are the advantages of issuing preference shares?
Unable to vote at AGM so control of company is not lost, Dividends at a fixed percentage rate so budegeting it easier.
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What are the disadvantages of issuning preference shares?
If profitability is low ordinary share holders (often the owners) may lose out completly on dividends because preference shareholders have to be paid first.
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What are the features of a debenture?
Fixed interest, fixed repyament date, doesn't give right of ownership, secured against assets, Can be traded on the stock market.
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What are the advantages of a debenture?
Debenture stock holders are unable to vote at an AGM an can't have a part in running the company, Interest is a fixed amount making budgeting easier.
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What are the disadvantages of a debenture?
If a profit is not made the interest still needs to be paid, gives better rights than ordinary shareholders if the company goes bust because they get repaid before.
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Other cards in this set

Card 2

Front

What are the advantages of internal finance?

Back

No interest is paid, no loss of control outside of the business.

Card 3

Front

What are the disadvantages of internal finance?

Back

Preview of the front of card 3

Card 4

Front

What are the features of a bank overdraft?

Back

Preview of the front of card 4

Card 5

Front

What are the advantages of a bank overdraft?

Back

Preview of the front of card 5
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