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Business Theme 2 > 2.1 Raising finance > Flashcards

2.1 Raising finance Flashcards

1
Q

When may a business need finance?

A

Starting up

Growing

Dealing with a cash flow problem

Financing extra materials needed when a large order is received

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2
Q

What are sources of finance?

A

Places from which businesses may gain finance.

Can be gained from internal or external sources

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3
Q

What are 3 sources of internal finance?

A

Personal savings

Retained profit

Sale of assets

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4
Q

What are personal savings?

A

Only relevant to start up/ small businesses

Can be provided in the form of share capital or a loan

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5
Q

Strengths of personal savings:

A

Entrepreneur keeps control of the business

No need to repay/ interest charge

Risking own savings can be motivational

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6
Q

Cons of personal savings:

A

May only be limited amounts available

Threat to personal finances/family

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7
Q

What is retained profit?

A

Any profit left once all costs have been paid/ dividends been paid to shareholders.

Safest/most common form of internal finance for established businesses

Not possible for start up businesses

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8
Q

Pros of retained profit:

A

Don’t have to pay any interest

Very flexible

Doesn’t dilute the ownership of the company

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9
Q

Cons of retained profit:

A

Profit is money that you are taking away from shareholders

Danger of hoarding cash

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10
Q

What is sale of assets?

A

When assets may no longer be needed and can be sold to generate cash for other projects

Only available for established businesses, especially when they want to change strategy

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11
Q

Pros of selling assets:

A

Can generate cash for other projects

No interest charge/repayments

Immediate lump sum cash injection

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12
Q

Cons of selling assets:

A

Only a one off option

Loss of the value of the asset/future value

May be expensive in the long run i.e asset needs to be leased back

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13
Q

What are 5 external sources of finance?

A

Family/friends

Banks

Peer-to-peer funding

Business angels

Crowdfunding

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14
Q

How can family/friends provide finance?

A

Extra start-up capital necessary for business start ups

Can provide loans when banks are unwilling

Shareholding/equity

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15
Q

Pros of family/friends:

A

Owner keeps control of the business

May be able to trust their business investors better

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16
Q

Cons of family/friends:

A

May cause tension/problems if the finance is not repaid or the business doesn’t flourish

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17
Q

How can banks provide finance?

A

Provide loans but insist on some collateral as security

Not common to start up businesses

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18
Q

What is collateral?

A

Something of value that is used as security so if unable to pay the loan back, the asset is sold to generate money for repayment

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19
Q

What is peer-to-peer funding?

A

Relies on websites that can match investors willing to lend to business start-ups needing finance

Loans will be at a high rate of interest but provide an option when banks are unwilling to lend

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20
Q

What are business angels?

A

Individuals who invest in the very early stages of a business taking a significant share.

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21
Q

Pros of business angels:

A

Offer support/expertise

Bring in large sums of money

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22
Q

Cons of business angels:

A

Can be seen as high risk as the business isn’t established

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23
Q

What is crowdfunding?

A

Obtaining external finance from many small investments, usually through a web based appeal for investors

Allows small investors to find business start ups in which they are willing to invest

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24
Q

How can other business provide finance?

A

Businesses may seek out small businesses that are either starting up/ or in early stages and help them out by providing finance

In return they will take a shareholding

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25
Q

What are methods of finance?

A

The process through which a source of finance provides money to a business

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26
Q

List 7 methods of finance:

A

Loans

Share capital

Venture capital

Overdrafts

Leasing

Trade credit

Grants

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27
Q

What are loans?

A

Can be provided by banks/friends/family or directors of the business

Involves providing a lump sum of cash which will be repaid over an agreed period of time

28
Q

Pros of loans:

A

Can raise significant amounts of money

Businesses can monitor how much they repay the bank

Don’t have to relinquish control of the organisation

29
Q

Cons of loans:

A

Money will have to be repaid with interest on top

30
Q

What is share capital?

A

Bringing are owners into the organisation in return for a share of the businesses ownership

Can only be used by a limited company

31
Q

Pros of share capital:

A

Can bring in larger sums of money/no interest repayments

New shareholders may bring in some industry knowledge, expertise and new contacts to aid the business

32
Q

Cons of share capital:

A

Have to relinquish some control of the business

Complex/costly process of issuing shares

33
Q

What is venture capital?

A

Method of providing finance in higher risk investments, generally through a combination of loans/shares

34
Q

Pros of venture capital:

A

Share holders will being in expertise that the business can utilise

Can borrow money when a bank has rejected it

35
Q

Cons of venture capital:

A

Rate of repayment may be higher than bank loans to compensate that the organisation is risky to loan money too

Have to relinquish some control in the organisation

36
Q

What are overdrafts?

A

A facility offered by a bank to allow a customer to continue spending money even when their account becomes negative.

There will be an agreed limit to the overdraft.

37
Q

Pros of overdrafts:

A

Allows businesses to continue purchasing assets that they need when they don’t have any cash

Good safety net for organisations

38
Q

Cons of overdrafts:

A

You have to pay to have an overdraft facility

Interest fees are much higher than borrowing from the bank

39
Q

What is leasing?

A

Renting an asset as an alternative to buying the asset outright. The asset will be rented for a monthly fee for a set period of time.

40
Q

Pros of leasing:

A

Avoids large chunks of cash outflows each time a new asset is purchased

Short term leasing is cheaper than buying an asset outright

41
Q

Cons of leasing:

A

Long term leasing will be more expensive than purchasing an asset outright.

42
Q

What is trade credit?

A

Goods/services provided by a supplier are not paid for immediately

43
Q

Pros of trade credit:

A

Supplier won’t charge interest

Flexible as the business decides when to pay

Commonly available

44
Q

Cons of trade credit:

A

Supplier can charge if there is a delayed payment

45
Q

What is a grant?

A

Handouts usually to small businesses from local or central government

Only relevant to businesses creating jobs in areas of economic deprivation or hi-tech firms competing with foreign rivals

46
Q

Pros of grants:

A

Don’t have to be repaid

47
Q

Cons of grants:

A

Not all businesses may be eligible for a grant

48
Q

What does liability mean?

A

To be responsible for debts

49
Q

What is limited liability?

A

When companies are not personally responsible for debts if the business goes wrong (less risky)

E.g PLC / LTD

50
Q

What are the implications of limited liability?

A

Owner/business have separate legal identities

Owner/business have separate assets

Business can sell shares to share holders (increases ability to grow/expand)

Owners personal savings are protected

Costly

51
Q

What is unlimited liability?

A

If a business has debts the owner must pay even if this means selling their own possessions to find the money

E.g sole trader/partnerships

52
Q

What are the implications of unlimited liability?

A

May have to sell assets to pay debts

Unable to sell shares

May be able to secure finances as banks will think they’re prepared to risk their own finances on the business.

53
Q

What sources of finance are appropriate for limited liability companies?

A

Share capital

Loans

Overdraft

Business angels

Trade credit

Leasing

Peer to peer

Crowdfunding

Venture capital

54
Q

What sources of finance are available for businesses with unlimited liability?

A

Owners capital

Loans

Overdraft

Leasing

Trade credit

55
Q

What is a business plan?

A

A look into the future of the business both in the market/financially

56
Q

Why does a business write a business plan?

A

To persuade lenders

Attract potential investors

To give the owners some direction

To set target (SMART)

To identify early on any problem areas

To monitor their effectiveness

57
Q

What is cash flow?

A

Needs to be able to pay day to day expenses

58
Q

What is a cash flow forecast?

A

A prediction of cash inflows/outflows in the future

59
Q

What is a cash flow statement?

A

A statement that shows what happened to cash inflows/outflows

60
Q

How to calculate net cash flow:

A

Cash inflow - Cash outflow

61
Q

How to calculate closing balance:

A

Net cash flow + Opening balance

62
Q

What are the main causes of cash flow problems?

A

Low profits/losses

Too much production capacity (spending)

Excess inventories held (stock)

Seasonal demand e.g Easter eggs in easter

Allowing customers too much credit

Overtrading (when a business expands too quickly)

63
Q

How to improve cash flow problems:

A

Increase volume of cash inflow

Reduce volume of cash outflow

Use reliable cash flow forecasting

Keep costs under control

Manage working capital effectively

Choose the right sources of finance

64
Q

What are the consequences of cash flow problems:

A

Insufficient liquid cash funds may mean an inability to meet short term debts

Limited cash may result in missed opportunities

Business may go into debt/fail

65
Q

What are the uses of cash flow forecasts?

A

Helps control/monitor cash in and out of the business

Arrange suitable finance at times of year

Minimise spending on equipment

Keeping stocks to a minimum

Producing/distributing products as quickly as possible

66
Q

What are the limitations of cash flow forecasts:

A

Bias

Prediction

Mistakes

Potential for a false sense of security

May be too optimistic

Business Theme 2 (5 decks)

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