Sources of Finance (Edexcel IGCSE Business): Flashcards
Exam code: 4BS1
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Define capital (business finance).
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Define capital (business finance).
Business finance, also known as capital, is the money a business needs to operate and grow.
What are short-term finance needs used for?
To meet day-to-day costs such as paying bills, suppliers and wages.
Short-term finance is usually a relatively small amount and rarely needed beyond year.
Short-term finance is usually a relatively small amount and rarely needed beyond one year.
What are long-term finance needs used for?
To fund the purchase of non-current assets (like buildings) or to acquire other businesses.
Which sources suit short-term finance needs?
Overdrafts or trade credit.
True or False?
Long-term finance needs usually involve large sums required for a significant period.
True.
Long-term needs are usually large sums required for a significant period, e.g. buying property.
Define start-up finance.
Start-up finance is money a new business needs to pay for fixed and current assets before it can begin trading.
Where is the amount of start-up finance a business needs identified?
In the business plan.
Owners often invest their own into a new business, and may also take out a start-up loan.
Owners often invest their own capital into a new business, and may also take out a start-up loan.
Why might a growing business need more finance?
To purchase capital equipment (machinery, buildings, vehicles) or to fund research and development of new products.
True or False?
A business only ever needs finance when it first starts up.
False.
A business needs finance for short-term and long-term needs, at start-up AND to grow.
Give a real example of a business investing heavily in R&D to grow.
Apple spent nearly $30 billion on research and development in 2023 to invest in AI and product innovation.
Longer-term finance is often needed to purchase assets, such as buildings and machinery.
Longer-term finance is often needed to purchase non-current assets, such as buildings and machinery.
Define internal source of finance.
An internal source of finance is money that comes from within the business.
Name the three internal sources of finance.
Personal savings, retained profit, and the sale of assets.
Why do owners often prefer internal finance?
It avoids paying interest on borrowing and avoids diluting control by selling shares.
When are personal savings a key source of finance?
When a business first starts up, or if there's a specific need like a cash-flow problem.
Define retained profit.
Retained profit is the surplus of revenue over costs from previous years that has not been distributed to owners.
Retained profit is a cheap source of finance because it does not involve borrowing or paying .
Retained profit is a cheap source of finance because it does not involve borrowing or paying interest.
What is the opportunity cost of reinvesting retained profit?
Shareholders do not receive extra profit for their investment.
How can selling assets raise finance?
By selling non-current assets no longer required (e.g. machinery, land, buildings) to generate cash.
Define sale and leaseback arrangement.
Sale and leaseback is when a business sells an asset (e.g. a building) for cash and then rents it back from the new owner.
True or False?
Internal finance always involves paying interest to a lender.
False.
Internal finance is often free — it does not involve borrowing or interest.
Give one advantage of using internal finance.
It is often free, involves no third parties, and can be organised quickly.
True or False?
Internal finance is usually less tax-efficient than external methods.
True.
Internal finance is rarely as tax-efficient, as loan repayments can be offset against tax.
Define an external source of finance.
An external source of finance is money introduced into the business from outside.
Name three external sources of finance.
Overdrafts, trade credit, loans, share capital, venture capital, and crowdfunding.
Define overdraft.
An overdraft is a flexible arrangement letting a business spend more than it has in its account, up to an agreed limit.
Why can using an overdraft for a long time be expensive?
Interest is charged at a daily rate, so long-term use is expensive compared to other methods.
Define trade credit.
Trade credit is an agreement to delay paying suppliers, typically for 30 to 90 days, which improves cash flow.
Trade credit is usually -free, but businesses may miss out on early payment discounts.
Trade credit is usually interest-free, but businesses may miss out on early payment discounts.
What is a mortgage?
A mortgage is a long-term loan used to purchase property, typically repaid over 25 or more years.
How can a private limited company raise finance from shares?
By selling shares to friends, family or private investors such as business angels.
Define debentures.
Debentures are long-term loan certificates issued by limited companies, repaid with a fixed rate of interest.
Define venture capital.
Venture capital is finance for businesses too risky for other lenders but with long-term growth potential, given for a share in the business.
Venture capitalists usually invest for a fixed period, typically four to years.
Venture capitalists usually invest for a fixed period, typically four to six years.
Define crowdfunding.
Crowdfunding raises modest investments from many people on online platforms such as Kickstarter.
True or False?
Crowdfunders own a share of the business they invest in.
False.
Crowdfunders do not own a share — their investments are often voluntary donations rewarded with incentives like early access.
What happens if a crowdfunding campaign doesn't reach its target?
The business receives no funding if the target isn't met by a set date.
Name two factors that affect a business's choice of finance.
Timescale, cost, purpose, legal structure, control, and the level of existing debt.
True or False?
Public limited companies can access a wider range of finance than sole traders.
True.
PLCs access a wide range of finance and can offer collateral; sole traders are seen as a greater lending risk.
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