3.1 Sources of finance Flashcards
Define Capital expenditure
Money spent to acquire fixed assets
THREE internal sources of finance
Retained profits
Sale of assets
Personal Funds
Define Revenue expenditure
THREE examples
day to day running expenses
- wages
- rent
- raw materials
FOUR most common external sources of finances
Share capital
Loan capital (from a bank)
Overdraft (from a bank)
Grants and Subsidies
Define dividend
dividend is money shareholders receive (usually annually) from the profit of a company
Who gives a trade credit ?
The seller of a product - by agreeing to late payment terms
the buyer may have to pay only, after he himself sold the product he made from the goods.
What is debt factoring ?
Selling the debts of others to a debt factor for an agreed percentage of the value of the debt.
Advantage: immediate cash, no risk in never getting in
Disadadvantage: not ht e full amount
What is a finance lease agreement?
TWO advantages
ONE disadvantage
Agreement between lessee (business) with a lessor to use assets over an agreed time and fixed rates.
- no capital required (better liquidity, can be used for revenue expenditure)
- often service and maintenance included
- on the long haul can be more expensive than buying an financing with a loan
Who needs is venture capital?
start-ups where the success in unclear.
This is high-risk capital with high profit targets.
Venture capitals often involved in the decision making process.
What is short - term - finance?
Which sources of finance are used?
day to day running of business
internal: retained profit
external : overdraft , trade credit
What is the difference between medium- and long-term-finance ?
medium : assets with ca. 5 years lifespan (equipment, cars) - bank loan, leasing
long 5-30 years, (factory building, machinery with long life-span) bank loans, share capital
What are factors that influence which source of finance is appropriate?
long, short or medium term purpose capital or revenue expenditure Finance cost (e.g. compare leasing with loan) Amount required Flexibility
When should a loan be flexible?
If the business is able to pay back earlier than expected it saves interest rates, compared to a loan with fixed term.
What are examples of external environment factors influencing financing decisions?
Interest rates
Inflation
Currency rates
When is a company high geared?
When they have a large proportion of loan capital compared to share capital.
Lowly geared companies can easier obtain loans or get lower interest rates.
