Sources of Finance Flashcards

Flashcards covering the vocabulary and key concepts related to sources of finance.

Debt factoring

Companies buy the debt from a business and offer immediate cash.

Debt factoring (pros & cons)

Raising cash quickly, without the hassle of chasing payments and reduces the risk of bad debts, but only 90-95% of the debt will now be paid.

Overdraft

Allows the business to draw out more money than in the account to an agreed limit

Overdraft (pros & cons)

Flexible and quick and easy to arrange, but fees can be high and can be removed at short notice.

Retained profits

Using the businesses own profits to reinvest back in to the business

Retained profits (pros & cons)

No interest or repayments need to be paid and cash is available quickly, but this source of finance can be limited if the business makes little or no profit.

Share capital

This is the issuing of shares to raise finance

Share capital (pros & cons)

No interest and don’t have to pay this back, but will have to sacrifice shares and can lose some control.

Bank Loan

A loan is a sum of money lent for a fixed period of time, repaid over an agreed schedule

Bank Loan (pros & cons)

Interest rate is fixed and the loan is guaranteed cash and the lender doesn’t have a say on how the business is run, but pay interest and may be secured against personal assets

Venture Capital

A professional investor who invests in high growth, high risk businesses in return for shares and a high return.

Venture Capital (pros & cons)

Large sums of money (£250,000+) and no interest paid, but may have to sacrifice shares of the business and they will expect return on their investment

Crowdfunding

This involves attracting investment from a large number of speculative investors many of whom may invest relatively small amounts.

Crowdfunding (pros & cons)

Offers the ability to raise finance from a large number of investors and no interest is paid, but partial loss of ownership and no guarantee that the crowd fund will attract sufficient investment

Internal sources of finance

Ones which come from the owners of or from within the business.

External sources of finance

Ones which come from outside of the business.

Short-term finance

Finance needed for a limited period of time, normally less than one year.

Long-term finance

Those sources of fiancé that are needed over a longer period of time, usually over a year.

Fixed costs

Costs that do not vary with the level of output, for example rent.

Breakeven point

The point where a firm’s total costs are equal to total revenue.