Sources of finance

HideShow resource information
What is the difference between internal and external sources of finance?
Internal are ways of raising finance within the business, whereas external comes from outside of the business.
1 of 25
What is the difference between short term and long term sources of finance?
ST normally intends for repayment within 12 months (normally revenue expenditure), whereas LT is due after three years or more (normally capital expenditure).
2 of 25
Define capital and revenue expenditure
CE- Spending on items that can be used time and time again (fixed+non-current assets). RE- Spending on a current, day-to-day costs such as the purchase of raw materials+wages payment (usually ST as this expenditure provides a quick return).
3 of 25
State two internal sources of finance
retained profit and debt factoring
4 of 25
Sate two external sources of finance
bank overdraft, loans, venture capital, ordinary share capital
5 of 25
State what factors need to be considered when choosing a source of finance
Legal structure of the business, use of the finance, amount required, firm's profit levels, level of risk, views of the owner.
6 of 25
Explain debt factoring as an internal and ST source of finance
Debt factoring is a financial arrangement by which a business sells its invoices to a third party at a discount. Businesses use debt factoring to improve their cashflow.
7 of 25
Advantages of debt factoring
Improves cash flow in the ST (may save expenses such as overdraft interest charges), lower administration costs (don't have to collect+chase up debts ), reduced risks of bad debts (factoring firm takes on the risk), increased efficiency.
8 of 25
Disadvantages of debt factoring
Loss of revenue (firm may lose between 5-10% of its revenue), high cost (firm has to pay the company more for its services than it would to pay a bank for a loan), customer relation problems (may not want to deal with a factoring company).
9 of 25
Explain an overdraft as an external and ST source of finance
Its when a bank allows an individual or organisation to overspend its current account in the bank up to an agreed limit and for a stated period of time.
10 of 25
Advantages of an overdraft
Very flexible, interest is only paid on the amount of the overdraft being used, particularly useful to seasonal businesses (during low sale periods some businesses experience cash flow problems), security is not usually required (no loss of assets).
11 of 25
Disadvantages of an overdraft
Level of interest rate charged can be higher than a loan, flexible interest rates (businesses may find its payments going up or down), banks can demand immediate repayment, a lot of paperwork (time-consuming + distracting from core activities).
12 of 25
Explain retained profits as an internal and LT source of finance
Its the part of the firm's profit that is reinvested in the business rather than distributed to shareholders. Its also known as plough-back profit. Its a good indicator of the success of a firm.
13 of 25
Advantages of retained profits
Cheap source of finance (no need to pay interest), no security required (as its using its own funds), independence+confidentiality (no firm info released), shareholder goodwill (should lead to an increase in share price if it improves the business).
14 of 25
Disadvantages of retained profits
Impact on dividends to shareholders (depriving its shareholders of money that they have right to receive), misuse of funds, opportunity cost, possibility of overcapitalisation+ineffective use of funds.
15 of 25
Explain ordinary share capital as an external and LT source of finance
Money given to a company by shareholders in return for a % share that gives them part ownership of the company. Also known as risk capital or equity capital.
16 of 25
Advantages of ordinary share capital
Limited liability encourages shareholders to invest, it is not necessary to pay a dividend (i.e. if the firm makes little or no profit that year), bringing new shareholders can further expertise, more shareholders makes it easier to borrow more funds
17 of 25
Disadvantages of ordinary share capital
Possible high divided payments (in more profitable years), conflict of objectives (original objectives of a business may be lost as new shareholders may not have the same values), loss of control for original owners.
18 of 25
Explain loan capital as an external and LT source of finance
Money received by an organisation in return for the organisations agreement to pay interest during the period of the loan and to repay the loan within an agreed time.
19 of 25
Advantage of loan capital
Easy for budgeting (interest rate are fixed in advance), lower interest rates are normally lower due to security provided, designed to meet the customers needs (size, and repayment can be organised to match firms expectations.
20 of 25
Disadvantages of loan capital
Limitations on amount available, inflexibility (usually less flexibility with loans so a firm will tend to pay interest for an agreed period), potential expense (start-ups are charged higher interest rates).
21 of 25
Explain venture capital as an external and LT source of finance
This is finance provided to a small or medium sized firm that seek growth but which may considered as risky by typical share buyers or other lenders.
22 of 25
Advantages of venture capital
Suited to high-risk companies (provided to firms that are unable to get finance from other sources), venture capitalists sometimes allow interest or dividends to be delayed, source of advice and contacts (provide advice to help a firm succeed).
23 of 25
Disadvantages of venture capital
Involves giving up some ownership of the business (they often demand a significant share of the business in return for they investment), possible high finance costs (Want high interest payments or dividends due to high risk), excessive influence.
24 of 25
State some other sources of finance
ST- Sales and leaseback (internal). LT- Debentures (external), mortgages (external), sales of assets (internal).
25 of 25

Other cards in this set

Card 2

Front

What is the difference between short term and long term sources of finance?

Back

ST normally intends for repayment within 12 months (normally revenue expenditure), whereas LT is due after three years or more (normally capital expenditure).

Card 3

Front

Define capital and revenue expenditure

Back

Preview of the front of card 3

Card 4

Front

State two internal sources of finance

Back

Preview of the front of card 4

Card 5

Front

Sate two external sources of finance

Back

Preview of the front of card 5
View more cards

Comments

No comments have yet been made

Similar Business Studies resources:

See all Business Studies resources »See all Financial Planning resources »