2.1 Raising Finance Flashcards
What are the advantages of using family and friends as a source of external finance?
- None / flexible low interest payments
- May not want stake in business
What are the disadvantages of using family and friends as a source of external finance?
- Limited funds
- May want stake in business causing tensions in friendships
What are the advantages of using banks as a source of external finance?
- Won’t interfere in business
- Fixed sum available
What are the disadvantages of using banks as a source of external finance?
- Formal application requiring a business plan, difficult if new business
- Interest payments and collateral
What are the advantages of using peer-to-peer lending as a source of external finance?
- Interest rates are lower than what the banks offer
What are the disadvantages of using peer-to-peer lending as a source of external finance?
- Unsecured loans (lender might lose money if borrower defaults)
- Limited funds
What are the advantages of using business angels as a source of external finance?
- Knowledgeable and experienced
What are the disadvantages of using business angels as a source of external finance?
- Difficult to find a suitable angel who has the same vision
- Requires compelling business proposition
- Wants a stake in the company
What are the advantages of using crowdfunding as a source of external finance?
- Lots of potential investors from around the world
What are the disadvantages of using crowdfunding as a source of external finance?
- No guarantee you’ll raise sufficient funds
What are the advantages of using share capital as a method of finance?
- No interest payments
- Raise large amounts of finance
What are the disadvantages of using share capital as a method of finance?
- Ownership and profits go to investors
What are the advantages of using venture capitals as a method of finance?
- Provide expertise and connections
What are the disadvantages of using venture capitals as a method of finance?
- Ownership and profits go to investors
What are the advantages of using overdrafts as a method of finance?
- Short-term fix for problems
What are the disadvantages of using overdrafts as a method of finance?
- High interest rate
- Bank has legal right to ask for repayment at any time
What are the advantages of using leasing as a method of finance?
- Maintenance and repair costs not responsibility of user
- Useful when equipment not always needed
What are the disadvantages of using leasing as a method of finance?
- In long term more expensive than buying it
What are the advantages of using trade credit as a method of finance?
- Business can sell goods and make profit before paying
What are the disadvantages of using trade credit as a method of finance?
- Cost is sometimes higher if not paid earlier (some suppliers encourage early payment by offering discounts)
What are the advantages of using grants as a method of finance?
- Governments invest for free, no repayment
What are the disadvantages of using grants as a method of finance?
- Difficult to obtain as many compete for it and criteria is difficult to meet
Why do businesses raise finance?
- Pay liabilities
- Fixed costs
- Expand business
What are the different unlimited liability business structures?
- Sole traders
- Partnerships
What are the different limited liability business structures?
- Public Limited Companies (PLC)
- Private Limited Companies (Ltds)
What are the implications of unlimited liability?
- Take less risks as personal assets on the line
- Unable to sell shares
- Banks more willing to give loans as they can sell their assets (collateral) if unable to repay
What are the implications of limited liability?
- Personal assets not at risk
- Can sell shares
- Business can sue and be sued
