2.1 Raising Finance Flashcards
what is Capital expenditure?
expenditure on resources that can be used repeatedly over a long period of time e.g. factory, machinery, vehicles
What is Revenue expenditure?
spending on business resources that have already been consumed or will be very shortly e.g. raw materials, energy, rent, utilities
What are the advantages to a bank loan?
-You won’t have to give the bank a percentage of your profit or a share in your company.
-Banks do not take any ownership of the businesses
-Quick and easy to organise
- interest rates tend to be low
What are the disadvantages to a bank loan?
- Have to pay off interest as well as original loan.
-can be hard to apply for a loans, you need substantial proof that you can repay them or valuable collateral e.g. real estate - Business borrowers can be required to provide personal guarantees, which means the borrower’s personal assets can be seized in the event the business fails and is unable to repay all or part of a loan.
What are the advantages to a Bank Overdraft?
-quick and east to arrange –> provides a good cash flow backup with minimum fuss
-Short-term can be cheaper than a loan
-good way to cover the period between money going out of and coming into a business.
What are the disadvantages to a bank Overdraft?
-Interest is repayable on the amount overdrawn and can be expensive if used over a longer period of time
-interest and fees on overdrafts are often at a higher rate than loans
-face large charges if you go over the agreed overdraft limit
What are the advantages to a business angel?
-BAs are free to make investment decisions quickly
-no need for collateral - i.e. personal assets
-access to your investor’s sector knowledge and contacts
-no repayments or interest
What are the disadvantages to a business angel?
-not suitable for investments below £10,000 or more than £500,000
-takes longer to find a suitable BA investor
-giving up a share of your business
-less structural support available from a BA than from an investing company
What are the advantages to Commercial Mortgage?
-Business has the use of the property
-Payments are spread over a period of time which is good for budgeting
-Once all repayments are made the business will own the asset
what are the disadvantages to a Commercial Mortgage?
-This is an expensive method compared to buying with cash
-If business does not keep up with repayments the property could be repossessed
What are the advantages of controlling stock levels?
-you dont have to pay, high storage costs, which includes space, insurance and workers
-if you have borrowed money to pay for stock by using JIT you save on interest fees
-stock doesnt go out of date
-able to change products if customer needs change
-less waste products
-less likely to be damaged as it hasnt been created yet
-employees can focus on tasks other than managing stock
-can reduce cost to production which makes product pricing more competitive
What are the disadvantages of controlling stock levels?
-possible loss of product or sales
-hard to cope with change in demand
- run out of stock - raw materials
-more panning needed thus more costs for computer systems etc
- economics of scales –> things cost more as they are being built as and when its needed
- if there is a problem with the supplier production stops
What are the advantages of Friends and Family?
-Your friends and family already know you very well – and you know them
-They will listen to your pitch because they care about you
-They are inclined to say, “Yes.”
-They can give you the time to build your business on your own schedule
-They will let you develop your vision into something others will recognize and value
-You will be set up to hit major milestones and raise the next round of funding from professionals at higher valuations.
What are the disadvantages of Friends and Family?
-Harder to convince someone to lend you money
-Your friends and family may know you too well
-They may not be able to add value because they may not understand your business
-They may not appreciate your entrepreneurial drive
-You will feel highly responsible for any losses they may incur
-You may put the people you love best at risk, if they are giving you a significant portion of your savings
-You may damage close relationships
What are the advantages of grants?
-Money is non- repayable
-help with a specific product or growth
What are the disadvantages of grants?
-Certain conditions may apply e.g. location
Not all businesses may be eligible for a grant
-you often only get the money after work has been completed (or a segment of work has been completed) so you also need enough in the bank to cover the costs till then
What are the advantages of leasing?
-it offers fixed rate financing; you pay at the same rate each month
-Businesses can have the use of up to date equipment immediately and payments are spread over a period of time which is good for budgeting
What are the disadvantages of leasing?
-Can be expensive
-as the asset never belongs to you, it remains the property of the leasing company during and after the lease
What are the advantages of personal sources?
-they can be easily dipped into (if necessary) when using an instant access savings account
-and no interest is paid on your money.
What are the disadvantages of personal sources?
-You can’t use that money for other things e.g. holidays.
-if you are using your own money, if the business fails you lose your money too
