Advantages of net current assets

- Quick way to raise money. - Reduces holding costs.

Disadvantages of net current assets

- May require accepting lower prices. - Debtors may delay payments.

A business borrows money from a bank over a set period, e.g., 5 or 10 years. Can have fixed or variable interest rates. Medium to long-term finance.

Advantages of Bank Loans

- Budgeting is easier with fixed monthly costs. - Fixed interest rates protect against rate rises. - Lower interest rates than overdrafts. - Purchased items become business assets. - Cheaper than leasing.

Disadvantages of Bank Loans

- High interest rates and security may be required. - Risk of bankruptcy if not repaid. - Costs more if interest rates rise. - Significant deposit may be needed. - Risk of losing the asset if defaulted.

Owners supply start-up capital or existing investors add more. Long-term finance.

Advantages of Owner Capital

- No interest payable. - Potential for profit if successful.

Disadvantages of Owner Capital

- Insufficient savings may limit investment. - Shareholders expect higher dividends. - Risk of losing investment if the business fails.

Long-term bank loan for property purchase. Fixed or variable interest rates. Repayment term up to 25 years. Long-term finance.

Advantages of Mortgages

- Property is an asset, increasing business value. - Benefit from rising property prices. - Provides long-term stability and flexibility.

Disadvantages of Mortgages

- May be more expensive than affordable. - Significant deposit may be needed. - Risk of losing property if defaulted. - Property values can decrease.

A platform where a business raises money online by asking people to invest, often offering rewards or incentives in return. It is external and short-term.

Advantages of Crowd funding

- Quick way to raise finance with no upfront fees - Valuable form of marketing - Feedback and expert guidance - Tests public reaction - Investors track progress - Ideas not appealing to conventional investors can get financed - Investors may become loyal customers

Disadvantages of Crowd funding

- Can take a long time to raise finance - May involve giving away part of ownership/control - Not all projects get onto platforms - Requires a lot of work before launch - Risk of receiving nothing if target not met - Failed projects risk reputation - Difficult to set rewards for investors - May be too small an amount

Involves individuals investing in businesses by providing large sums of money for part ownership and profit share. It is external and long-term.

Advantages of Venture Capital

- Expert guidance - Mentoring and increased success chances - Willing to take more risks than banks - Quick decision on availability - Links to wider customer/supplier base

Disadvantages of Venture Capital

- Loss of ownership and control - Potential conflict with business owner - May involve giving away equity/control - High cost compared to other sources - May be too small to attract venture capital

Involves selling the business’s invoices to a third party for a percentage of the value. Debtors owe money to a factor agency, which pursues payments from customers. External, short-term.

Advantages of Debt Factoring

Lump sum money comes into the business.

Disadvantages of Debt Factoring

Impacts profit margins by sacrificing a percentage of potential sales. Can affect business reputation as the factor company contacts customers for payments.

Businesses lease items like cars or machinery, paying monthly to use them. External, medium-term.

Advantages of Leasing Equipment

Avoids unwanted assets post-lease. Budget-friendly as lease amount remains constant. Allows for equipment updates and includes repair costs. Modern equipment without large upfront costs.

Disadvantages of Leasing Equipment

Enterprise does not own the asset. Additional costs for early lease termination. No modifications allowed. More expensive long-term. Asset doesn’t contribute to business wealth.

Allows businesses to pay monthly for an item, owning it after all installments. External, medium-term.

Advantages of Hire Purchase

Once all installments are paid, the enterprise owns the asset.

Disadvantages of Hire Purchase

More expensive than buying outright with cash.

Buy now pay later - when a business has an agreement with their supplier to receive goods/raw materials and pay later, usually between 30-90 days. External | short-term. (+) No interest is paid. Good for cash flow. (-) Can only be used for certain types of goods. Loan is limited to payment terms with the supplier.

Local or national governments give businesses money for activities they encourage, like providing jobs in low employment areas. This money does not need to be paid back. External. (+) Grants do not need to be paid back. (-) Only certain enterprises can obtain government grants.

Used with non-profit organizations, involving individuals or businesses donating money without needing it to be returned. External. (-) Difficult to plan and budget as they aren’t guaranteed. Can be affected by the economy. Negative publicity can deter donations.

Small investors use an organization to help them find businesses to invest in, with a fee for matching. External | long-term. (+) Access lower interest rates than banks. Unsecured loans are flexible. Online applications are fast and convenient. (-) Not guaranteed to raise needed amount. Requires credit check. May have application fees. Interest payments could be higher.

The business borrows against the value of its outstanding invoices for a fee. External | short-term. (+) The business manages the customer relationship. (-) Loss of some profit. Might not have enough outstanding invoices to raise needed money.

BTEC - LAD sources of finance Flashcards

Student preview

38 questions

Show all answers

1.

FLASHCARD QUESTION

Front

Retained profits

Back

The profit a business makes which it keeps within the business to finance growth.

2.

FLASHCARD QUESTION

Front

Advantages of retained profits

Back

- No repayment or interest. - Owners have control. - Less risky than borrowing. - Immediate availability.

3.

FLASHCARD QUESTION

Front

Disadvantages of retained profits

Back

- Not available for new enterprises. - Insufficient profits may limit investment. - Less capital once used. - Opportunity cost of using cash.

4.

FLASHCARD QUESTION

Front

Selling assets

Back

Assets of value that a business owns and can sell to generate cash.

5.

FLASHCARD QUESTION

Front

Advantages of selling assets

Back

- Raises money from unneeded assets. - May avoid the need for a loan.

6.

FLASHCARD QUESTION

Front

Disadvantages of selling assets

Back

- May lack sellable assets. - Future need for the asset. - Time-consuming for larger assets. - May not cover full amount needed.

7.

FLASHCARD QUESTION

Front

Net current assets

Back

Also known as ‘working capital’. Cash available after deducting current liabilities from current assets.

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