Professional Documents
Culture Documents
NOTES
Definition to learn:
Start up capital: is the finance needed by a new business to pay for
essential fixed and current assets before it can begin trading.
Definitions to learn:
SOURCES OF FINANCE
These types of finance can be split into:
Internal or external
Short-term, medium-term, or long term
Retained profits:
Advantages
Retained profits does not have to be repaid
Disadvantages
A new business will not yet have any retained profits.
FINANCING BUSINESS ACTIVITY
Many small firms could find that their profits are too low to finance
the expansion needed.
Keeping more profits in the business reduces payments to owners,
for example dividend to share holders.
are those assets which are no longer required by the business. For
example, redundant buildings or surplus equipment.
Advantages
This makes better use of the capital tied up in the business.
Disadvantage
It may take some time to sell these assets.
This source of finance is not available for new business as they
have no surplus assets to sell.
Disadvantage
It must be done carefully to avoid disappointing customers if not
enough goods are kept to stock
Owners savings
Advantages
It should be available to the firm quickly
No interest is paid
Disadvantages
Savings may be too low
It increases the risk taken by the owners.
Issue of shares:
limited companies
Advantages
This is a permanent source of capital which would not have to
be repaid to share holders.
No interest has to be paid.
Disadvantages
Dividends will be expected by the share holders.
The ownership of the company could change hands.
Bank loans
Advantages
Usually quick to arrange, can be for varying length of time.
FINANCING BUSINESS ACTIVITY
Disadvantages
A bank loan will have to be repaid eventually and interest must be
paid
Security or collateral is usually required.
Debentures:
Advantage
Debentures can be used to raise very long term finance, for
example 25 years.
Disadvantages
As with loans these must be repaid and interest must be paid.
Factoring of debts:
buy the debts of firms for immediate cash. They may offer 90percent
of an existing debt. The debtor will then pay the factor and the 10
percent represents the Factors profit.
Advantages
Immediate cash is made available
FINANCING BUSINESS ACTIVITY
Disadvantage
The firm does not receive 100 percent of the value of its debts.
Advantage
These grants and subsidies usually do not have to be repaid.
Disadvantage
They are often given with strings attached for example the firm
must locate in a particular area.
Definitions to learn:
Overdrafts: These are arranged by a bank. The banks give the
businesses the right to overdraw more money from the bank account
than is currently in it.
Advantages
The firm could use this finance to pay wages or suppliers but
obviously, it cannot do this indefinitely.
The overdraft will vary each month with the needs of the
business. It is said to be a flexible form of borrowing
Interest will be paid only on the amount overdrawn.
Overdrafts can turn out to be cheaper than loans.
Disadvantages
Interest rates are variable, unlike most loans which have fixed
rates.
The bank can ask for the overdraft to be repaid at very short notice.
Definitions to learn:
Trade Credit:
Advantage
It is almost an interest free loan to the business for the length
of time that payment is delayed for.
Disadvantage
The supplier may refuse to give discounts or even refuse to supply
any more goods if payment is not made quickly.
Factoring of debts
See page 4 under external finance
Medium-term finance
This is finance which is available for between three and five years.
Bank loans
These are payable over a fixed period of time. The advantages and
disadvantages of these have already been considered under external
finance.
Hire Purchase
This allows a business to buy a fixed asset over a long period of time
with monthly payments which include an interest charge.
Advantage
The firm does not have to find a large cash sum to purchase
the asset.
Disadvantages
A cash deposit is paid at the start of the period.
Interest payments can be quite high.
FINANCING BUSINESS ACTIVITY
Leasing
Leasing is like renting a piece of equipment or machinery. The
business pays a regular amount for a period of time, but the item
belongs to the leasing company.
Advantages of leasing
Cheaper in the short run than buying a piece of equipment
outright
If technology is changing quickly or equipment wears out
quickly it can be regularly updated or replaced.
Cash flow management easier because of regular payments
Disadvantage of leasing
More expensive in the long run, because the leasing company
charges fees, which makes the total cost greater than the
original cost.
Disadvantage
They must be repaid, as they are not permanent capital
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Issue of shares
Refer to external finance
Issue of debentures
Refer to external finance
In getting funds, businesses need to consider the
following factors.
Amount of money required the amount of capital required
can range from just a few dollars to pay an outstanding bill to a
huge investment in a new factory. When a business requires a
large sum of money, it will have to borrow from a large financial
institution or ask shareholders to provide more share capital.
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12
Business Plan
A business plan sets out how a business is going to achieve its aims
and objectives.
FINANCING BUSINESS ACTIVITY
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14
Year
Nov 2009
May 2008
Nov 2007
May 2007
Nov 2006
Nov 2004
Nov 2003
May 2003
May 2002
Nov 2001
Paper 1
Q1d
Paper 2
Q1b
Q1a,
Q4a,
Q1b,
Q2b
Q2(d)
Q2a(iii),c
Q1b,c,
Q1a,Q5b,
Q6,
Q4b,
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