Sources of Business Finance Flashcards
All 22 cards in this deck
What is an overdraft?
An agreement with the bank allowing a business to overspend on its account, up to a limit.
What is trade credit?
An agreement allowing a business to buy goods from a supplier now and pay for them at a later agreed date.
Name the two short-term sources of finance for a small business.
Overdraft and trade credit.
Give one advantage of trade credit.
The business can sell the goods before paying the supplier, improving cash flow; no interest is charged if credit terms are met.
Give one disadvantage of trade credit.
Suppliers may not offer it to a small business placing small orders.
Give one advantage of an overdraft.
It provides cash in months when demand is low, supporting the business until demand increases.
Give one drawback of an overdraft.
It can be expensive as the bank may charge a high rate of interest, increasing costs.
Name three long-term sources of finance for a start-up or small business.
Any three of: personal savings, venture capital, share capital, loans, retained profit, crowd funding.
What is venture capital?
Finance invested in a business by an investor in return for a share of the ownership, usually in high-risk businesses.
What is crowd funding?
Raising finance from a large number of people, usually online, each contributing a small amount.
What is retained profit?
Profit kept in the business after costs and tax, reinvested rather than paid out to owners.
What is share capital?
Money raised by selling shares in the business to investors, who become part-owners.
Give one advantage of using retained profit.
It is cheap — no interest is paid and ownership is not diluted, so owners keep full control.
Give one disadvantage of using retained profit.
It may not be large enough to fund expansion, and once used it cannot be used again for other purposes.
Give one disadvantage of a bank loan.
Interest must be paid, increasing fixed costs; repayments mean larger cash outflows and greater risk of cash-flow problems.
Give one disadvantage of raising finance through issuing shares.
Issuing a large number of shares reduces the percentage ownership of existing shareholders.
Give one advantage of crowd funding compared with a bank loan.
No interest has to be paid, keeping costs low and reducing financial risk.
Give one disadvantage of crowd funding.
If not enough money is raised, the business cannot cover the costs it needs to fund.
True or false? Trade credit is a long-term source of finance.
False. Trade credit is a short-term source of finance.
What is the difference between short-term and long-term finance?
Short-term finance is usually repaid within a year and pays for day-to-day costs such as stock or bills. Long-term finance covers a longer period, often several years, and pays for starting up or expanding the business.
What is a bank loan?
A fixed sum borrowed from a bank and repaid, with interest, in regular instalments over an agreed number of years.
What are personal savings as a source of finance?
The owner's own money, put into the business. It has no interest and no repayments, but the owner loses it if the business fails.