3.2 - Sources of Finance

These flashcards cover various concepts related to sources of finance, including definitions and examples.

What are personal funds in the context of finance for sole traders?

Personal funds are the main source of finance for sole traders and partnerships, consisting of the owner's own savings.

What is retained profit?

Retained profit is the value of finance that a business keeps after paying taxes and dividends, to reinvest in the business.

How can a business raise finance through the sale of assets?

By selling unused assets such as old machinery, computer equipment, or land, a business can raise money.

What are some examples of external sources of finance?

Share capital, loan capital, overdrafts, trade credit, crowdfunding, leasing, microfinance providers, and business angels.

What is share capital?

Share capital is the main source of finance for limited liability companies, raised by issuing shares to the public.

What are the advantages of using loan capital?

Loan capital allows businesses to borrow money with repayment by installments, providing time to earn revenue.

What are overdrafts in financial terms?

Overdrafts allow businesses to withdraw more money than they have in their bank account for short-term funding.

How does trade credit work?

Trade credit allows businesses to receive goods now and pay for them later, typically within 30 to 60 days.

What is crowdfunding?

Crowdfunding is a way of raising finance from many individuals, each contributing a small amount for a new business venture.

What is leasing in finance?

Leasing is the renting of assets over a contracted period, where businesses can use assets without purchasing them outright.

Who are business angels?

Business angels are wealthy individuals who invest their personal funds in high-growth potential businesses.

What are microfinance providers?

Microfinance providers offer financial services to entrepreneurs from disadvantaged sectors, enabling them to start or grow a business.

What is a decision tree in business?

A decision tree is a tool used to evaluate different financing options and their potential outcomes.

What factors should firms consider when selecting a source of finance?

Cost, time, purpose of expenditure, amount required, financial situation, and status/size of the business.

What type of expenditure does retained profit represent?

Retained profit represents capital and revenue expenditure.

What are the disadvantages of relying on personal funds as a source of finance?

The amount available is limited to the owner's savings, and there may be expectations of repayment with interest if borrowed from friends or family.