(2.1) Raising Finance

Question 1

What is Owners Capital and it’s advantages and disadvantages?

Answer 1

Money provided by the owner, normally from their personal savings

+Cheap (no interest)
+

Question 2

What is Retained Profits and it’s advantages and disadvantages?

Answer 2

Profit after tax that is put back into the business

+Cheap (no interest)
+

• Shareholders may want to receive it as dividends
• May not be a lot of it

Question 3

What is Sale of Asset and it’s advantages and disadvantages?

Answer 3

Selling unwanted assets

+Frees up value in unwanted assets
+

Question 4

What is Internal Finance?

Answer 4

Money generated by the business or owners

Question 5

Advantages and disadvantages of internal Finance?

Answer 5

+ Capital is available immediately
+ Cheap as there’s no interest to pay (lower costs higher profits)
+ No need for third parties (i.e. )

• internal finance can be limited
• High Opportunity cost

Question 6

What are the 3 main internal sources of finance?

Answer 6

Retained profits, Sale of assets, Owners capital

Question 7

What is external finance?

Answer 7

Money generated from outside the business.

Question 8

What is an Overdraft and it’s advantages and disadvantages?

Answer 8

The ability to withdraw more money from your account than is available

+Allows for flexibility
+

Question 9

What is Trade Credit and it’s advantages and disadvantages?

Answer 9

When suppliers allow a business to owe them money for a period of time

+Good for raw materials as it allows businesses time to generate money before having to pay

-Any delays in payment can damage the relationship with the supplier

Question 10

What are Grants and it’s advantages and disadvantages?

Answer 10

A sum of money provided by the government to a business that does not have to be repaid.

+Don’t owe the money back
+Useful for small businesses

-Generally given to businesses that help the environment, economy or social

Question 11

What is Leasing and it’s advantages and disadvantages?

Answer 11

Renting an asset that the business requires

+Assets can be acquired without large

Question 12

What are Bank Loans and it’s advantages and disadvantages?

Answer 12

+Can invest personal capital
+Keep Control of the Company
+Bank Loan is Temporary

• Tough to Qualify
• High Interest Rates

Question 13

What is Venture Capital and it’s advantages and disadvantages?

Answer 13

The capital provided to businesses by individuals in return for shares in the business

+can help your company grow quickly
+The money is yours to keep

• Your investors own a stake in your company
• Can make decision making difficult

Question 14

What is Share Capital and it’s advantages and disadvantages?

Answer 14

Money invested in a company by the shareholders.

+Lower Risk
+No Repayment Requirement

• Time and Effort - may need to provide a pitch
• Only available to Ltd and Plc

Question 15

What is limited liability and it’s advantages and disadvantages?

Answer 15

The owner and business are separate legal entities

+Protects the personal wealth of the shareholders
+Business continues to exist even when the shareholders change

• Increased taxes
• less privacy
• More regulations you have to follow

Question 16

What is unlimited liability and it’s advantages and disadvantages?

Answer 16

The owner and the business are the same legal entity

I.e. the owner takes all responsibility from the business even debts. Any debts owned by the business, the owners will have to repay

+More freedom as there are less regulations to follow
+Saving money of taxes

• Business owners are personally responsible for the debts of the business
• High risk

Question 17

What is the difference between Private limited company and a public limited company

Answer 17

Private - Owned by a few shareholders

Public - Owned by many shareholders

Question 18

What is a Business Plan?

Answer 18

A legal document that describes each element in the business

Question 19

Who uses a Business Plan?

Answer 19

Owners, Lenders, Investors, Partners and employees

Question 20

What is the finance appropriate for limited liability?

Answer 20

• Share capital
• Retained profits
• Venture capital
• Business angels
• Bank loans

Question 21

What is the finance appropriate for unlimited liability?

Answer 21

• Personal savings
• Retained profits
• mortgages
• Crowed funding
• Grants
• Bank overdrafts
• Unsecure bank loans

Question 22

What is a Cash-flow Forecast?

Answer 22

A projection of the likely cash inflows and outflows in a business.

Question 23

What are the advantages of cash-flow forecast?

Answer 23

-Helps identify any potential cash flow problems

Question 24

What are the disadvantages of cash-flow forecast?

Answer 24

• Some estimates are based on estimates

- Variable are constantly changing, frequent updates are made to to forecast

Question 25

What are the advantages and disadvantages of a business plan?

Answer 25

+Makes the owner consider every aspect of the start up
+Makes the owner aware of potential skills that they are missing
+Venture capital may be available to the business if investors like the plan

• Doesn’t guarantee success, sales may be lower than expected
• Can be unrealistic