2.1 Flashcards
What is internal finance and the 3 types
Internal finance- money that comes from within the business
3 types of internal finance
- Owners capital
- Retained profit
- Sale of assets
Define owners capital and give advantages
Owners capital- refers to the money that the business owner invests into the business from their own personal savings
ADV of owners capital
- No interest
- Quick and convenient
- Low risk as no borrowing
- Full control
DIS of owners capital
- Personal savings may be lost if business is unsuccessful
- Owners could lose their personal investment
- Limited Funds: The amount available is limited to the owner’s personal savings, which may not be sufficient for large-scale investments or expansion.
Define retained profit and give adv
Retained profit- profit that has been made by the business in previous years that is then re-invested back into the business
ADV of retained profit
- No interest
- Full control
- Quick and convenient
- Easy access to money- not time consuming
DIS of retained profit
- Opportunity cost as once money is gone, its not available for any future problems the business may face
- Shareholder pressure as shareholders may wish to recieve it back in the form of dividends
- Limited Availability: The business can only use the profits it has generated. If the business hasn’t been profitable, it may not have retained profit to use.
Define sale of assets and give ADV
Sale of assets- selling business assets which are no longer required eg machinery, land, equipment
ADV of sale of assets
- Can create space for more profitable uses
- Frees up value in unwanted assets to be invested in other areas of the business
- Quick- Selling assets can provide quick access to cash
- No interest
DIS of sale if assets
- Business loses the benefit of the asset as it might be needed in the future
- Might not get the full market value of the assets,leading to a loss due to depreciation of assets
- Not Sustainable: The sale of assets is typically a one-time source of finance. Once the assets are gone, the business can no longer rely on this method.
6 types of sources of finance
- family and friends
- banks
- peer-to-peer funding
- business angels
- crowd funding
- other businesses
Family and friends adv and dis
Advantages of family and friends
-Quick access to capital
- No interest
Disadvantages of family and friends
- Risk of damaging personal relationships if the business fails.
- Potential pressure from family or friends to provide updates or make decisions they support.
Bank adv and dis
Bank- financial institution that provides credit and loans
ADV of bank
-Large sums of money can be borrowed for various business purposes.
DIS of bank
- High interest rates or collateral requirements
Peer to peer adv and dis
Peer to peer- A method of raising funds through online platforms that connect businesses with individual investors
ADV of peer to peer
- Can raise funds quickly
- Flexibility in terms of loan amounts and repayment terms
DIS of peer to peer
- High interest
Business angels adv and dis
Business angels- people that invest into start-up businesses in exchange for equity
Adv of business angels
-Access to substantial funds for startup or growth.
-Business angels often provide valuable advice and mentorship.
-More willing to take risks than banks
Disadvantages:
- Business owners may have to give up equity and control in the company.
- Finding the right angel investor can be time-consuming.
- Receive a share of the businesses profits
Crowdfunding adv and dis and define
Crowdfunding involves a large number of people investing small amounts of money in a business
ADV of crowdfunding
- Cheap and easy to set up
- Can generate capital from a wide audience without giving up equity
- Fast way to raise finance
- Large pool of investors
- Creates brand awareness
- Customer feedback
DIS of crowdfunding
- Success depends on having a large, engaged audience.
- Potential for reputational damage if the business fails to deliver on promises.
- If targeted amount isnt reached the money is returned to investors and the business gets nothing
- Platform fees
7 methods of external finance
- loans
- share capital
- venture capital
- overdrafts
- leasing
- trade credit
- grants
Loan adv and dis
Loan- Borrowing a set amount of money from a bank that is repaid with interest over a fixed period.
Loan adv
- Access to large sums of money.
- Fixed repayment schedule makes budgeting easier
- No loss of ownership
Loan dis
- Interest must be paid, increasing the cost.
- May require security (collateral), like property.
Share capital adv and dis and define
Share capital- Raising money by selling shares of the business to investors
ADV of share capital
- No interest
- Large sum of money= able to expand and achieve objectives
DIS of share capital
- Owners lose some control of the business.
- Shareholders expect dividends and business success.
Venture capital adv and dis
Venture capital- Venture capital is money invested by individuals or firms into a high-risk business, usually in exchange for a share of ownership (equity).
ADV of venture capital
- Expertise
- Large sum of money
- Good for startups struggling to access bank finance
DIS of venture capital
- Loss of some ownership and control
- Give up profits= may limit growth
Overdraft adv and dis
Overdraft- A short-term facility allowing a business to spend more than it has in its bank account
ADV of overdraft
- Large sum of money
- Flexible- able to borrow anytime
- Helps manage short-term cash flow.
DIS of overdraft
- High IR repayment
- Bank may ask for repayment at any time= reduces cash flow
Leasing adv and dis
Leasing- renting equipment or property instead of buying it outright
Advantages:
-No large upfront costs.
-Maintenance may be included.
Disadvantages:
-Total cost over time may be higher than buying.
-The business never owns the asset.
Trade credit adv and dis
Trade credit- When a business buys raw materials and stock but pays for thema t a later date
ADV of trade credit
- No interest
- Helps cash flow—use goods before paying
- Can generate revenue before having to pay
DIS of trade credit
- Late payments may lead to damaged relationships with suppliers
- Not always available for new or small businesses.
Grant adv and dis
Grant- money given by gov that doesnt need to be repaid
Advantages:
-No repayment, no interest.
-Encourages innovation or social impact.
Disadvantages:
-Often competitive with strict criteria.
-May come with conditions on how money is used.
Define limited liability and give implications
Limited liability- The owners (shareholders) are only responsible for business debts up to the amount they invested. Their personal assets are protected.
Implications:
-Personal assets are safe if the business fails.
-Easier to raise external finance (investors are more likely to invest).
-More legal and financial regulations to follow.
-Must publish financial information.
Define unlimited and give implications
Unlimited- The owner is personally responsible for all the business’s debts. If the business can’t pay its debts, the owner’s personal assets (e.g. house, car) can be used to cover them.
Applies to: Sole traders and ordinary partnerships.
Implications:
-Higher personal risk for the owner(s).
-Fewer legal formalities and less regulation.
-Harder to raise large amounts of finance.
-Owners keep all the profit and control.
Appropriate sources/methods:
For limited liability business
(LTD/PLC)These businesses can access external finance more easily because of their structure.
-Share capital (selling shares)
-Venture capital
-Bank loans
-Business angels
-Crowdfunding
-Retained profit
-Trade credit
-Leasing
Appropriate sources/methods:
For unlimited liability
(Sole Traders/Partnerships)
-They usually rely on personal or informal sources of finance.
-Owner’s capital (personal savings)
-Loans (usually small bank loans)
-Overdrafts
-Trade credit
-Leasing
-Family and friends
-Retained profit
-Grants (if eligible)
Adv and dis of limited liability
✅ Advantages:
-Personal assets are protected – shareholders only lose what they invested.
-More attractive to investors – they face limited risk.
-Can raise more finance – especially
through selling shares.
-Easier to grow and expand – more funding options available.
❌ Disadvantages:
-More legal responsibilities – must register as a company and follow company law.
-Higher setup and admin costs – legal and accounting fees.
-Must publish financial info – less privacy.
-Profits may be shared – between shareholders.
Adv and dis of unlimited liability
✅ Advantages:
-Simple and quick to set up – fewer legal requirements.
-More control – owner keeps all decision-making power.
-Keeps all profits – no shareholders to share with.
-Privacy – financial information stays private.
❌ Disadvantages:
-Owner is personally liable – personal assets at risk if the business fails.
-Harder to raise finance – banks and investors may see it as too risky.
-Greater personal stress – financial pressure is on the owner.
-Limits business growth – less access to large-scale funding.
What’s a business plan
A business plan is a written document that outlines a business’s goals, strategies, and how it plans to achieve them.
Adv and dis of business plan
Advantages:
-Helps secure finance from banks or investors.
-Sets clear objectives and strategies for the business.
-Helps identify potential risks and plan for them.
-Encourages better decision-making and organisation.
Disadvantages:
-Takes time and effort to prepare properly.
-May become outdated quickly if the market changes.
-Can give a false sense of security if assumptions are wrong.
-Some investors/lenders may still say no, even with a good plan.
Define cash flow forecast, cash inflow, cash outflow, formula for net cash flow,opening and closing balance
A cash-flow forecast predicts the cash inflows (money in) and outflows (money out) over a period of time
Cash inflow: Money coming into the business (e.g., sales, loans).
Cash outflow: Money going out (e.g., rent, wages, bills).
Net cash flow = Inflows − Outflows
Opening balance = Cash at the start of the month.
Closing balance = Opening balance + Net cash flow (becomes next month’s opening balance).
Adv and dis of cash flow forecast
✅ Advantages:
-Helps predict cash shortages in advance.
-Aids in financial planning and budgeting.
-Useful when applying for loans or credit.
-Helps ensure the business can pay bills and staff on time.
❌ Disadvantages:
-Based on estimates – may not be accurate.
-Doesn’t include non-cash items like depreciation.
-Can be affected by unexpected events (e.g. late payments).
-Needs regular updating to stay useful.
