sources of finance

What are some reasons a business needs a source of finance?

Expanding, starting a new business, covering start-up costs, and improving cash flow position.

What are the key considerations a business must make when choosing a source of finance?

Whether it's long-term or short-term, affordability of interest, ownership implications, liabilities, level of control, legal structure, amount required, level of risk, specific use of finance, profit levels, views of owners, and whether it's a new or established business.

What are three common sources of finance for a business?

Bank loan, overdraft, and sale of assets.

What is the difference between internal and external sources of finance?

Internal sources come from within the business (e.g., retained earnings, sale of existing assets). External sources come from outside the business (e.g., bank loans, overdrafts, issuing shares).

What is an advantage of using retained profit as an internal source of finance?

It allows existing shareholders to retain control by avoiding the need to sell further shares, and the business avoids interest on a loan.

What are some disadvantages of relying on retained profit for finance?

It may take time to accumulate, the amount available is limited, and there's an opportunity cost.

When is retained profit often used as a source of finance?

Usually by an established and profitable business that can't access external sources of finance.

What type of finance is cheap, flexible, and quick to access for short-term needs?

Overdraft.

What are the main risks associated with using an overdraft?

High interest rates and the risk of overspending.

For what cash flow situations is an overdraft typically used?

For short-term cash flow problems and day-to-day operational needs when experiencing cash flow issues.

How does debt factoring improve a business's cash flow?

It provides a cash injection, improves reputation, reduces the burden of collection, and offers faster access to capital.

What are potential drawbacks of using debt factoring?

It can lead to reduced profits and increased costs.

When is debt factoring most commonly used?

In the short-term when a business is experiencing cash flow problems, helping with cash flow forecasts.

What is a straightforward advantage of using the sale of assets as a source of finance?

It provides a one-off capital payment.

What are the significant disadvantages of selling assets for finance?

It can be hard to arrange, the loss of an asset may reduce capacity, the asset might be needed later, and there are tax implications.

For what funding needs is the sale of assets suitable?

For short-term cash flow problems, as a one-off source of finance.

What are the benefits of obtaining a bank loan?

It provides financial stability, often comes with fixed interest rates, and allows access to large sums of funds.

What is a potential negative aspect of a bank loan that can impact cash flow?

Interest rates can fluctuate, leading to negative cash flow if not managed well.

When would a business typically seek a bank loan?

When buying machinery, for long-term investments, or for other expensive, one-off purchases.

For what specific purpose is a mortgage used as an external source of finance?

When buying property.

What are the initial financial considerations for a mortgage?

High initial costs and an interest deposit.

What advantages does crowdfunding offer for raising capital?

It's a fast way to raise finance and provides access to a large number of investors.

What are some of the challenges or disadvantages of crowdfunding?

It can be competitive, takes a potentially long time to raise, and there's a risk that no one might want to invest, especially for small amounts or some high-risk propositions.

For what stage of business development is crowdfunding often suitable?

For starting up or expanding, particularly new businesses.

What additional support, besides funds, can venture capital provide?

Professional advice to high-risk investments.

What is a significant drawback for founders when taking on venture capital?

Venture capitalists may want a share in the company, diluting founders' control.

Which types of businesses typically attract venture capital?

High-risk, new businesses that are starting up or expanding.

What is a primary advantage of share capital as a source of finance?

It is a source of permanent capital with no repayment or interest obligations.

What are the major disadvantages of financing through share capital?

The business becomes vulnerable to a takeover, and founders can lose control over decision-making and who buys shares.

When is share capital commonly used by a business?

When raising large sums of finance or when a company becomes a public limited company (PLC).