Sources of Finance Flashcards

All 20 cards in this deck

What are start-up costs?

The costs of setting up a business before it begins trading, e.g. premises, equipment, stock and legal fees.

Why do businesses need short-term finance for day-to-day running?

To keep cash flow positive when paying wages, stock and bills during seasonal variations, late customer payments or unexpected changes in orders.

Give two reasons an established business (not a new one) needs finance.

To expand (new premises, machinery or new markets) and to replace worn-out or out-of-date assets.

What is the difference between an internal and an external source of finance?

Internal finance comes from inside the business itself; external finance comes from outside the business.
e.g. internal = retained profit; external = bank loan

True or false? A bank overdraft is an internal source of finance.

False. An overdraft is external — like bank loans and mortgages, the money comes from outside the business. Retained profit is internal.

Which source of finance is most suitable for a short-term cash shortage lasting a few weeks?

An overdraft (or trade credit) — short-term borrowing, not a long-term loan.

What is retained profit?

Profit the business keeps and reinvests in itself rather than paying it out to the owners.

What does 'selling unwanted assets' mean as a source of finance?

Raising money from equipment, vehicles or property the business no longer uses. It is internal and the money does not have to be repaid.

What is a bank overdraft?

A short-term arrangement where a bank allows a business to spend more money than it has in its account, at a variable interest rate.

What is trade credit?

An agreement with a supplier to receive goods now and pay later, typically within 30, 60 or 90 days.

Which source of finance could be given to a business to create jobs in an area of high unemployment?

A government grant — money that does not have to be repaid.

What is a new share issue, and which businesses can use it?

Selling new ordinary shares to investors who become part-owners. Only companies (ltd and plc) can issue shares.

True or false? Shareholders can demand their money back from the business at any time.

False. Share capital is permanent — shareholders must sell their shares to someone else to get their money out.

What percentage of shares must founders keep to stay in majority control after a share issue?

More than 50 per cent. Issuing more shares dilutes control and can leave the business open to takeover.

What is a bank loan, and what is its main advantage for planning?

Money lent by a bank and repaid with interest over an agreed period. Fixed instalments make budgeting and planning easier.

State one risk of taking out a bank loan secured against the owner's home.

If the business cannot repay, the owner risks losing the home.

What is a mortgage as a source of business finance?

A long-term loan used to buy property, secured against that property.

What is hire purchase?

Paying for an asset in instalments and using it straight away; the business only owns it after the final payment.

Give one advantage and one disadvantage of borrowing from family and friends.

Advantage: they may lend interest free, which saves money. Disadvantage: they may want repaying in a short period, putting pressure on cash and on the relationship.

What are the steps to recommend the most suitable source of finance for a business?
e.g. an established shop with £50 000 retained profit needs £20 000 for new equipment

1. Identify what the money is for and for how long: a long-term asset purchase.
2. Check the financial data and internal sources first: £50 000 retained profit covers the £20 000, with some left.
3. Recommend and justify against one alternative: use retained profit — no interest to pay, unlike a bank loan.