9609 · 5.2.2
Internal and external sources of finance flashcards
Revision flashcards for Cambridge 9609 Internal and external sources of finance (syllabus 5.2.2). Flip, recall, then mark a real past-paper question.
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Internal source examples?
Retained profit, sale of redundant assets, reducing inventory, tighter credit control.
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External source examples?
Share issue, bank loan, overdraft, debentures, leasing, trade credit, crowdfunding, venture capital.
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Retained profit advantage?
No interest, no dilution, no repayment schedule — if profits exist.
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Share issue disadvantage?
Dilutes ownership and control; flotation costs for PLC.
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Overdraft vs loan?
Overdraft: flexible short-term facility. Loan: fixed amount, fixed term — for planned investment.
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Leasing?
External — acquire asset without large upfront cost; no ownership (operating lease).
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Trade credit?
Pay suppliers later — free short-term finance if paid within discount period.
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Venture capital?
External equity for high-growth start-ups — investors expect high returns and often influence.
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What is Retained Profit?
The portion of a company's net profit that is not distributed to shareholders as dividends but is instead reinvested into the business. It is a key source of internal finance.
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Define Gearing.
A financial ratio that measures the proportion of a company's capital that comes from debt. A high gearing ratio (e.g., over 50%) indicates high financial risk as the business is heavily reliant on borrowed funds.
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What is Venture Capital?
A form of private equity finance provided by venture capital firms or funds to start-ups, early-stage, and emerging companies that have been deemed to have high growth potential. In return for the high-risk investment, venture capitalists take an equity stake.
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Explain Debt Factoring.
A financial service where a business sells its accounts receivable (invoices) to a third party (a factor) at a discount. This provides the business with immediate cash but reduces the profit margin on the sales.
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What is the 'opportunity cost' of using retained profit?
The dividend payments that shareholders miss out on when a business decides to reinvest its profits instead of distributing them. This can lead to shareholder dissatisfaction if the reinvestment does not generate a sufficiently high return.