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A-level Business (new) > 2.1- Raising Fiannce > Flashcards

2.1- Raising Fiannce Flashcards

1
Q

What’s the definition of finance

A

Finance means the management of the investment needed to; open, run and grow a business

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2
Q

What are the reasons for raising finance

A

To pay debts

To help a business over a slow trading period - overdraft

To expand: a business may apply for long term finance such as a loan

To start-up a business may apply for a loan with a business plan or ask friends and family to invest

To buy stock

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3
Q

What is owners capital

A

It shows the stake the owner has in the business

This represents the net assets of the company – if all the debts of the business were paid off how much would be owed to the owner

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4
Q

What are 3 internal sources of finance

A

Retained profit

Sale of assets

Owners equity

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5
Q

Advantage of using retained profits as a source of finance

A

• No interest payments to be made on loans

• Easy access to finance, if it is in a bank
account it could be accessed the same day, this is in comparison to a loan which could take longer with all the paperwork

• Owners keep control

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6
Q

Disadvantages of using retained profits as a source of finance

A

Loss of interest payments on savings should the retained profits be left in a savings account instead

• Opportunity cost of not being able to use the retained profits elsewhere in the business

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7
Q

What’s an advantage of selling assets as a source of finance

A

• No interest payments to be made on loans

• Straightforward sale can take place on a number of platforms e.g. eBay

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8
Q

What a disadvantage of selling assets as a source of finance

A

Once the business has sold the asset they lose the benefit of it e.g. a van they cannot make deliveries with

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9
Q

Advantages of using owners capital as a source of finance

A

No interest payments to be made on loans

• Easy access the owner may have the funds
sitting in a bank or savings account

• No complex paperwork and no security needed

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10
Q

Disadvantages of using owners capital as a source of finance

A

Owner may not have the capital to put into the business and may still need to borrow, some businesses may have a term debt to gain a long-term profit

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11
Q

What is the difference between a source of finance and a method of finance

A

Source of finance: This is where the finance has come from e.g. a bank

• Method of finance: This is the use of a finance – or what use it would be suitable for e.g. loan to buy computer equipment for the business

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12
Q

What are examples of external sources of finance

A
  1. family and friends
  2. banks
  3. peer-to-peer funding
  4. business angels
  5. crowd funding
  6. other businesses
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13
Q

Advantages of using family and friends as a source of finance

A

Loans from friends and family will probably be offered without the need for security and at lower rates and over longer terms than traditional lenders

• They are also unlikely to need a business plan which means the owner may not need to write one

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14
Q

Disadvantages of using family and friends as a source of finance

A

Downside is that it may cause tension and problems if the finance is not repaid or the business does not flourish.

• They may also demand their money back at short notice

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15
Q

Advantages of using banks as a source of finance

A

Banks will lend to businesses without asking for a % of the ownership

• Banks will allow the business owner to continue running the business their own way, and not interfere, so the owner retains control of the business (unlike business angels)

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16
Q

Disadvantages of banks

A

Bank loans can be expensive compared to other sources of finance and interest must be paid back on time

• It may be hard for a new business owner to obtain a loan as they have no historical sales data to show the bank

• The owner may need to use their own assets as security for the loan e.g. their own house

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17
Q

What’s peer to peer funding

A

Peer-to-peer funding matches businesses that need finance with investors who are looking for a good return on their investment

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18
Q

What’s the advantages of using peer to peer funding as a source of finance

A

Businesses can get access to funding within a week once approved

• Business owners can apply online

• Investors can expect returns of 6-7% whereas a savings account might only give them 3%

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19
Q

Disadvantages of peer to peer funding as a source of finance

A

Peer to peer loans are classified as private business loans, so the money for the loan comes from several investors or small businesses.

If there are not enough individuals interested or willing to invest in your loan, you may not be able to acquire the entire amount that the business needs

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20
Q

What’s advantages of business Ángels

A

Angels are free to make investment decisions quickly

• The owner gets access to your investor’s sector knowledge and contacts

• The owner gets access to angels mentoring or management skills

• The owner will have no repayments or interest on the money lent

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21
Q

What’s the disadvantages of using business angels

A

Not suitable for investments below £10,000 or more than £500,000

• Owner needs to give up a share of the business

22
Q

What’s crowd funding

A

Crowd funding is where a large number of people fund a project over the internet making small investments each

23
Q

Advantages of crowd funding

A

Good alternative to loans for small business owners

• Finance can be obtained without paying upfront fees

• The business can generate funds and also promote the business at the same time

24
Q

Disadvantages of crowd funding

A

The business will need to show case their idea to investors and may need to put together a video and other promotional material to attract investors

25
Q

What are external methods of finance

A
  1. loans
  2. share capital
  3. venture capital
  4. overdrafts
  5. leasing
  6. trade credit
  7. grants
26
Q

Advantages of using loans as a method of finance

A

As the loan is fixed for a certain length of time the business owner can plan ahead and knows exactly what the repayments will be and when they will leave the bank account

• Banks will not ask for a % of the business or get involved in the running of the business

• Getting into a high street bank to apply for a business loan is a straight forward process

27
Q

Disadvantages of using loans

A

• A bank will charge interest on the loan

• Not very flexible, the business may incur a penalty if they decide to settle the loan early

• A bank will ask for security or collateral on a loan this may be a house or another asset that can be seized if the loan is not paid back

28
Q

Advantages of share capital as a method of finance

A

Investors are often prepared to provide extra funding as the business grows

• More cost effective way to raise finance than a loan – no interest to pay back

• Finance is based on acquiring more equity rather getting further into debt

29
Q

Disadvantages of using share capital as a method of finance

A

Potential investors may require a great deal of background information before they buy the shares

• The more shares that are sold, the more the profits have to be divided up and paid out to investors as dividends

• Can be expensive and slow process to organise

30
Q

What’s venture capital

A

Venture capitalists (VCs) will invest large sums of other people’s money in a business in return for shares in the company.

31
Q

Advantages of venture capital

A

Useful if the business is looking to raise a large amount of money in a short space of time e.g. £1 million

• The business gets all the skills of the venture capital business, their network and links may increase revenue streams

• Great for owners who have been refused a loan from a bank

32
Q

Venture capital disadvantages

A

• Venture capital firms look for a strong business plan, sound management and a proven track record, making it difficult for start-up firms

• Venture capital firms typically want 20-30% stake in the business

33
Q

Advantages of overdrafts

A

For a business owner this would idea as a quick fix method to tide the business over a difficult month of trading

• An overdraft can be arranged on the phone

• or online with an instant decision from the bank

• The business will only pay interest on the amount of money that they are overdrawn

• As soon as the business improves trading they can easily pay back the overdraft to the bank and the interest charges will stop

34
Q

Disadvantages of overtrafts

A

• If the business goes over this amount the overdraft will be “unauthorised” and the business will be charged heavily

• Very expensive source of finance, very high charges and interest rates

• Not suitable for large amounts over a long period of time

35
Q

Advantages of leasing

A

This is a lower monthly costs for a business owner than a loan

• Often business leases can be arranged without any advanced fees being paid

• The leasing firm maintain the equipment, vans, cars etc. so the business will always have reliable working equipment

36
Q

disadvantages of Leasing

A

Leasing is often over a fixed term, if the business changes its mind and wants to lease from a different company, contracts may be difficult to get out of

37
Q

What is trade credit

A

When one business trades with another they will sometimes need to “buy” goods with trade credit

• The seller gives the buyer 30, 60, 90 days to pay

38
Q

Advantages of trade credit

A

• Business can sell the goods before the stock needs to be paid for, so can make a profit before the costs have to be paid

• No interest has to be paid on trade credit

• Businesses that pay regularly on time can build relationships with their suppliers and secure better deals

39
Q

Disadvantages trade credit

A

• Not all stock is available to buy using the trade credit method, so only applies to certain industries

• If the business does not pay in time they risk being refused further credit by the supplier in the future

40
Q

Advantages of government grants

A

The business usually will not have to pay the grant back

• Unlike a loan there will be no interest to pay

• The business owner will get funds without any loss of control of the business

41
Q

Disadvantages of government grants

A

• A business will have to find a grant that suits their specific project, which can be difficult

• There’s a lot of competition for grants

• The business may be expected to match the funds they are awarded, eg a grant might cover part of the cost of a project

• Grants are usually awarded for proposed projects, not ones that have already started

• The application process can be very complex and time-consuming

42
Q

What business firms have unlimited liability

A

sole traders and partnerships

43
Q

What businesses have limited liability

A

Private li,tied company

Public limited company

44
Q

What finance is suitable for an unlimited liability business

A

• Business loans from a bank
• Private investors e.g. angels
• Credit cards from a bank
• Crowd funding from websites • Trade credit from suppliers
• Owners savings
• Overdraft from the bank

45
Q

Finance suitable for a limited liability business

A

• Retained profit from the business
• Sale of assets from the business
• Ordinary and preference share issues
• Government grants
• Venture capital – as they may be borrowing larger amounts than unlimited liability businesses

46
Q

What is a business plan

A

A business plan is a document which sets out the future plans for a business

It is how an business owner will explain how they will turn their idea into a successful business

47
Q

Why does a business write a business plan

A

To persuade lenders that the business will make enough profit to be able to pay back interest and loan capital on any finance taken out

• Attract potential investors to the business

• To give the owners some direction – once a plan is written down it is more likely to be followed

• To set targets (smart) and objectives that can be followed

Help monitor their effectiveness

Identify any early problems

48
Q

What’s a cash flow forecast

A

A cash flow forecast is the day-to-day running of a business budget

• A cash flow forecast will show where the business will have a shortfall of cash (not enough to pay their short- term bills)

• Allows the business to organise short- term cash borrowing to cover the shortfall e.g. an overdraft

49
Q

What’s the purpose of a business plan

A
  1. To help set up a new business
  2. To help the business raise finance
  3. To help the business to set objectives
  4. To outline how functions of the business will be organised
50
Q

What are the uses of a cash flow forecast

A

A business will prepare a cash flow forecast to help control and monitor cash in and out of a business

51
Q

What are the limitations of a cash flow forecast

A

A cash flow forecast is only a 12 month snapshot which is very short term to make any concrete decisions about the business, they may need longer term finance

• This is only a forecast – an estimate actual sales or expenses might be higher

• The owner may have overstated expenditure or understated income

It could be very risky for an investor to make decisions about the business on just the cash flow forecast alone

A-level Business (new) (19 decks)

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