BTEC Business - D1

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  • Created by: Kaicee05
  • Created on: 14-05-23 15:52

Internal Sources of Finance

Retained Profit - Profit kept in the business to fund future expenditure. 

+ No interest charge, available immediately, no loss of control, helps to avoid debt

- Amount available may be limited, reduces payment to shareholders

Net Current Assets -  Shows money available in the business to find day to day expenditure. 

+ Encourages business to manage cash flow effectively

- Pressure on customers as shorter credit terms, lower stock affects customer needs

Sale of assets - Selling an asset owened by the business in order for immediate cash.

+ No interest charges, reduces capital tied up in assets, get rid of things no longer in use

- Amount received may not be true reflection of price, can increase cost if need to be leased back

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External Sources of Finance

Owner's Capital - Money invested in the business from personal savings. 

+ No interest payments or need to repay, high level of commitment

- Amount is likley to be limited, could cause friction if multiple owners

Loans - Money borrowed from banks for a set period and specific purpose. Interest is payable. 

+ Regular payments make budgeting easy, control isn't lost 

- Interest is charged, rates can fluctuate, might be secured aganst an asset. 

Crowd Funding -  Attracting investement from investors who invest small amounts. 

+ Raise finance from investors, no interest paid

- Partial loss of owenershiop, no guarantee it'll attract investment

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External Sources of Finance

Mortgages - Long term loans secured against an asset, eg. house. Interest is payable.

+ Repaid over prolonged period, control is not lost

- Interest charged, rates can fluctuate, asset can be seized if payment missed

Venture Capital - Investement from an experienced entrepreneur in return for equity.

+ Finance provided by a professional, risk takers, see potential in a high risk investement

- Partial loss of control, may cause conflict over the way the business is ran

Hire Purchase - Paying to use an asset in parts. Remains property of seller until final payment. 

+ No lump sum, regular payments make budgeting easy, spreads cost 

- Amount is likley to be higher, only suitable for low cost assets

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External Sources of Finance

Leasing - Involves paying to use an asset in installments. Spreads cost over useful life. 

+ Supplier is responsible for maintenance, no lump sum, cost is spread

- Amount is likley to be higher, payments are ongoing, never actually own the asset

Trade credit - Period of time offered by suppliers to allow customer to buy now and pay later. 

+ Delays need to pay, no loss of control

- Potential loss of discount offered for cash payments, only suitable for short term. 

Grants - Lump sum provided by the Government for a specific purpose. 

+ No need to repay, no interest charge, no loss of control

- Lengthy application process, only rewarded if certain conditions are met

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External Sources of Finance

Donations - Sums of money given voluntarily to charity or social enterprise. 

+ No need to repay, no interest charges, no loss of control 

- Small amounts only, can be unpredictable 

Peer to peer lending - Involves one person lending money to another in return for interest.

+ Interest rates may be lower than bank, fixed rates make budgeting easier

- Amount may be limited, may only be available for short period of time

Invoice discounting - Reductions offered to customers making a product or service cheaper.

+ No need to repay, no interest charge, no loss of control, reduces cost so increases profit

- Often only available if paid in cash, can affect cash flow

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External Sources of Finance

Debt Factoring - Selling a businesses debt to a third party to receive cash. Company pays the business a percentage of money owed and takes responsibility for debt.

+ Speeds up cash flow from debt, sompany takes on risk of bad debt

- Only receive a percentage of amount owed which reduces profit, can give wrong impression to customers. 

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