AQA GCSE Business - Finance

Cards (100)

  • Why do businesses need to raise finance
    - Start up costs
    - Growth
    - New resources
    - Day to day running costs
    - Research and development
    - Improve efficiency
    - Replace worn out assets
  • Why do new businesses need to raise finance
    - Renting or buying a building
    - Vehicles
    - Advertising
    - Equipment and machinery
    - Inventories of raw materials
  • What is meant by raising finance
    The process of getting the funds needed, for example, to start a new business
  • What is a source of finance
    A means of raising funds that are required by a business for purposes such as expansion
  • What are inventories
    Raw materials that have not yet been used or products that have been made, but not sold; these are also called stocks
  • Why do established businesses need to raise finance
    - To expand
    - To improve efficiency (e.g. training, technology)
    - To develop new products
  • What are internal sources of finance
    Money that is available from within a business, for example, retained profits from previous years
  • Give examples of internal sources of finance
    - Owners funds
    - Retained profit
    - Selling assets
    - Owners investment
  • What are owners funds, and which legal structures is it mainly used by
    - Money put into a business by its owner or owners
    - Sole traders or partnerships
  • What are the benefits of using owner funds to raise finance
    - The business does not have to pay interest
    - No control over the business is given up
    - Provides a strong signal to other potential investors and the bank of the entrepreneurs commitment to the business
  • What are the drawbacks of using owner funds to raise finance
    - Only a finite amount of owner funds
    - No external input is given to the business (e.g. other methods may result in advice from external stakeholders given)
    - Entrepreneur may have to use other sources of finance to fund the business
  • What are retained profits and what type of business is most likely to use it
    - The part of a business's annual profit which is kept within the business to finance future investments
    - Established businesses that have made a profit
  • What are the advantages of using retained profits to raise finance
    - No interest payments
    - Can be arranged immediately
    - No control/shares given up
    - Flexible; business owners have complete control over how any profits are reinvested and the proportion that is kept in the business, rather than paid out as dividends
    - Safe, low risk approach (e.g. during a recession) as there is no debt)
  • What are the disadvantages of using retained profit to raise finance
    - only available to profitable businesses
    - May create conflict with shareholders (lower dividends)
    - Usually finite retained profit, resulting in slow growth as profits may not be high enough to finance the growth quickly
    - No expertise added; compared to debt and equity, there are no bank managers or shareholders to advise decisions
  • What is an asset
    something that is owned by a business e.g. land, buildings, vehicles, and machinery
  • In what two ways can an asset be sold
    - Selling assets such as buildings for cash
    - Selling an asset and leasing it back, so that it is still available for use
  • What are the advantages of selling assets to raise finance
    - No interest payments
    - May keep assets (if leased back)
    - No control is given up
    - If you can find a buyer it is a quick form of raising finance
  • What are the disadvantages of selling assets to raise finance
    - Many businesses do not have suitable assets
    - Leasing assets back means regular payments
    - There is only a finite number of times a business can sell assets
    - Risk of selling assets which may be needed by the business
    - Risk you cannot find a buyer
    - You may not receive a fair value for the asset if you are desperate to sell and take any offer
    - Value of assets depreciates over time (depending on what it is) so businesses may not sell for as much as they would like to
    - Likely to be short term
  • What type of legal structure is selling assets to raise finance used by
    Established businesses
  • What are the advantages of internal sources of finance
    - No loss of control
    - No interest paid
  • What is the disadvantage of internal sources of finance
    - Opportunity cost (e.g. dividends)
    - No external influence, using an external source may result in external stakeholders advising the business
  • What source of internal finance is best suited for; short term, medium term, and long term

    Short term; Cash in bank/owners funds, sale of assets
    Medium term; Retained profits, sale of assets
    Long term; retained profits, owners investment
  • What is equity, give examples
    All non debt sources of finance (e.g. share capital)
  • What are external sources of finance
    Money that comes from outside the business, e.g. a loan from a bank
  • Give examples of external sources of finance
    - Bank loans
    - Mortgages
    - Overdrafts
    - New share issues
    - Hire purchase
    - Government grants
    - Trade credit
    - Venture capital
    - Loans from friends and family
    - Crowd funding
  • What is trade credit
    A period of time which suppliers allow customers before payment for supplies must be made
  • What are the benefits of using trade credit to raise finance
    - Simple to arrange and maintain if credit terms are met
    - Cheap form of short term finance (e.g. cheaper than overdraft)
    - No control of business is given up
    - No interest charged
    - Allows the business to use the goods in the manufacturing process and/or sell the goods before it pays the supplier, which will improve its cash flow position
  • What are the drawbacks of using trade credit to raise finance
    - Risk of spoiling relationship with with supplier if credit terms are not met (long term consequences)
    - Large fine if you pay late (after credit terms)
    - Short term
    - Only small sums of money can be raised
    - Difficult for new start up business to negotiate trade credit with suppliers, as there is a risk that the business will fail and suppliers may end up not getting paid
  • Which legal structure is using trade credit most useful to
    New/start up businesses
  • What is a bank loan
    When a business borrows a sum of money and pays it back with interest over an agreed period of time
  • What type of legal structure is a bank loan most likely used by
    - Mostly new/start up businesses
    - Can be used by any business
  • What are the benefits of using bank loans (and mortgages) to raise finance
    - No shares given up, so the business keeps control
    - Repayments are made in instalments meaning the business can access substantial amounts of cash that does not need to be paid back in one go
    - Likely to have a lower interest rate than an overdraft, thus lower costs
    - Able to be bespoke to business needs (e.g. repayment terms)
    - Frequent repayments may improve credit rates (however, reliant on the fact that the business will make regular repayments)
    - Can be arranged quickly
    - Allows repayment over a long period of time
  • What are the drawbacks of using bank loans (and mortgages) to raise finance
    - Assets will be taken if the business fails to repay (need limited liability)
    - Time consuming; a business would need to produce a detailed business plan to gain a bank loan
    - No flexibility as the business has to keep to the initial repayment terms; even if the business does not use all the money, interest must be paid on the full loan amount
    - Failure to make repayments can result in a worse credit score, limiting the possibilities of getting loans in the future
    - Not guaranteed to get a loan from the bank
    - Interest is charged
    - Bank may ask for a collateral, which increases costs; the bank can sell this if the business fails to repay the loan (in a mortgage, the house is the collateral)
  • What is a collateral
    An asset that a bank holds as security for the repayment of a loan
  • What is a mortgage
    Loans from banks and building societies that are used to buy land and buildings, such as offices and shops
  • What is an overdraft
    When a business withdraws more cash from a bank account that it holds
  • What type of business most commonly uses overdrafts as a source of finance
    Mostly new/start up businesses
    Can be used by any businesses
  • What are the benefits of using overdrafts as a source of finance
    - Quick and simple to organise; immediate availability once agreed
    - Can be bespoke to the needs of each business (e.g. seasonal businesses or unexpected expenses)
    - No control of the business given up
    - Offers flexibility
    - Important source of finance for a business if it has a short term shortage of cash or unexpected cost to pay
    - Interest only paid on the amount used
  • What are the drawbacks of using overdrafts as a source of finance
    - Higher interest rate compared to a loan (it is short term)
    - Bank could cancel or lower overdraft at any time (only happens if one has severe financial problems)
    - Persistent use of overdraft may ruin credit rating; this can increase interest rates on future loans and increase risk of rejection from banks to take a loan out (reduces ability to expand)
    - Bank may not agree to some businesses an overdraft
  • What is new share issue
    When a limited company sells shares in exchange for a payment