finance sources - A Level Business Revision Notes

Why businesses need finance

• Start-up capital: money used in setting up

• Working capital: day to day finance needed to pay bills + expenses (Current assets - current liabilities)

Microfinance

When do we need long-term finance?

• When expanding, chances of being to repay 1-year long loans is slim => needs long-term finance

When do we need short-term finance?

• Helpful if business experience seasonal demand as they have to buy inventories before the busiest months

What is external finance?

Finance obtained from outside the business, usually involving repayment, interest, or loss of ownership.

What is borrowing from family and friends?

A form of external finance obtained from contacts, often under informal arrangements.

What is a pro of borrowing from family and friends?

Low or no interest; flexible repayment terms; quick access.

What is a con of borrowing from family and friends?

Risk of damaged personal relationships; limited funds.

What are bank loans?

Borrowed capital from a bank repaid over time with interest.

What is one pro of bank loans?

Large sums available; ownership retained; fixed repayment schedule.

What is a con of bank loans?

Interest increases costs; requires strong business plan and credit history.

What are mortgages?

Long-term secured loans used to purchase property, with the asset as collateral.

What is a pro of mortgages?

Lower interest rates; suitable for long-term investment.

What is a con of mortgages?

Risk of repossession if repayments fail; long-term commitment.

What is an overdraft?

Short-term borrowing allowing a business to spend beyond its bank balance up to an agreed limit.

What is a pro of an overdraft?

Flexible(You can borrow up to a pre-approved limit); useful for short-term cash flow problems.

What is a con of an overdraft?

High interest rates; can be withdrawn at short notice.

What is peer-to-peer (P2P) lending?

Online platforms that connect businesses directly with individual lenders.

What is a pro of P2P lending?

Faster access to finance; fewer formal requirements than banks.

What is a con of P2P lending?

Interest charged; platform fees apply.

Who are business angels?

Wealthy individuals who invest in start-ups in exchange for equity or convertible debt.

What is a pro of business angels?

Willing to take high risks; provide expertise, advice, and contacts.

What is a con of business angels?

Loss of ownership; reduced control over decision-making.

What is crowdfunding?

Raising small amounts of money from a large number of people via online platforms.

What is a pro of crowdfunding?

Suitable for start-ups; builds customer awareness and loyalty.

What is a con of crowdfunding?

High competition; funding targets not guaranteed.

What are joint ventures/strategic partnerships?

Two or more businesses sharing finance and resources for a common project.

What is a pro of joint ventures?

Access to large finance; shared expertise and market knowledge.

What is a con of joint ventures?

Shared control and profits; potential conflicts or takeover risk.

What are debentures?

Long-term loan agreement with fixed interest, repaid by a specified date.

What is a pro of debentures?

Fixed repayments aid budgeting; ownership retained.

What is a con of debentures?

Interest depends on credit rating; default risks asset seizure.

What is share capital?

Raising finance by selling shares to investors.

What is a pro of share capital?

Large amounts of capital; no repayment required.

What is a con of share capital?

Ownership diluted; shareholders gain voting and control rights.

What is venture capital?

Finance provided by specialist investors to high-growth businesses.

What is a pro of venture capital?

Very large sums available; strategic guidance provided.

What is a con of venture capital?

Significant loss of control; pressure for rapid growth.

What is leasing?

Renting assets instead of purchasing them outright.

What is a pro of leasing?

No large upfront cost; maintenance often included.

What is a con of leasing?

More expensive long term; no asset ownership.

What is trade credit?

An agreement allowing businesses to buy goods now and pay suppliers later.

What is a pro of trade credit?

Interest-free short-term finance; improves cash flow.

What is a con of trade credit?

Loss of early-payment discounts; damaged supplier relationships if late, high overall costs

What are grants?

Funds provided by governments or organisations that do not need to be repaid.

What is a pro of grants?

No repayment or interest.

What is a con of grants?

Strict conditions on usage; difficult to obtain.

What is internal finance?

Finance raised from within the business, without borrowing or selling ownership.

What is owner’s capital?

Money invested by the owner from personal savings.

What is a pro of owner’s capital?

No interest payments; full ownership and control retained.

What is a con of owner’s capital?

Limited by personal wealth; high personal financial risk.

What is retained profit?

Profit kept in the business instead of being paid to shareholders as dividends.

What is a pro of retained profit?

No interest or repayment; no loss of control.

What is a con of retained profit?

Depends on profitability; shareholders may be dissatisfied.

What is the sale of assets?

Selling unused or non-essential assets to raise cash.

What is a pro of selling assets?

Quick source of finance; improves liquidity.

What is a con of selling assets?

Reduces productive capacity; one-off source.

What does cost reduction/cutting expenses involve?

Reducing operating costs to free up internal funds.

What is a pro of cost reduction?

Improves cash flow; increases efficiency.

What is a con of cost reduction?

May lower quality or employee morale.

What is improved working capital management?

Better control of cash, inventories, and receivables.

What is a pro of improved working capital management?

Releases cash tied up in the business; no external risk.

Debt factoring

Selling unpaid customer invoice to another company for immediate cash

Advantages of debt factoring

• Get money immediately

• Save time + resources

Disadvantages of debt factoring

• Receive less than total invoice

• Reduced profit margins

  • Potential harm to customer relations (aware of 3rd party)

Hire purchase

Buying an asset in installments

Advantages of hire purchase

• Get the asset immediately

• Get full ownership at the end, unlike leasing

• Fixed payments

• Easy to obtain (for start-ups, new businesses)

Disadvantages of Hire purchase

• High overall cost

• Risk of repossession