2.1 Raising Finance Flashcards
define capital
the money provided by the owners in the business
Why does a business raise finance?
buy fixed assets
Needed to pay day to day costs
Cover its loans
To expand
What factors should a business consider when choosing a source of finance
amount of money required
Level of risk involved
Cost of the finance e.g. Interest
Define capital expenditure
spending on business resources that can be used repeatedly over a period of time
Define internal finance
money generated by the business or its owners
define retained profit
profit after tax that is put back into the business
Define revenue expenditure
spending on business resources that have already been consumed or will be very shortly
define sale and leaseback
the practice of selling assets, such as property or machinery, and leasing them back from the buyer
define authorised share capital
the maximum amount that can be legally raised
Define bank overdraft
an agreement between a business and a bank that means a business can spend more money than it has in the account, limit is agreed and interest is charged when the business is overdrawn
Define capital gain
the profit made from selling a share for more than it was bought
define crowd funding
where a large number of individuals invest in a business on the internet avoiding the use of a bank
Define debenture
a long term loan to a business
define equities
another name for an ordinary share
Define external finance
money raised from outside the business
define issued share capital
amount of current share capital arising from the sale of shares
define lease
a contract to acquire the use of resources such as property or equipment
Define peer to peer lending
where individuals lend to other individuals without prior knowledge of them, on the internet
define permanent capital
share capital that is never repaid by the company
Define secured loans
a loan where the lender requires security, such as property to provide protection in case the borrower defaults
Define share capital
money introduced into the business through the sale of shares
Define unsecured loans
where the lender has no protection if the borrower fails to repay the money owed
Define venture capitalism
providers of funds for small or medium sized companies that may be considered too risky for other investors
Define collaterol
an asset that might be sold to pay a lender when a loan can’t be repaid
Define incorporated business
a business model in which the business and the owner have seperate legal identities
Define limited liability
a legal status that means shareholders can only lose the original amount they invested in a business
Define long term finance
money borrowed for more than one year
define rights issue
issuing new shares to existing shareholders at a discount
Define shirt term borrowing
money borrowed for a year or less
Define undercapitalised
a business not raising enough capital when setting up
Define unincorporated business
a business model in which there is no legal difference between the owner and the business
Define unlimited liability
a legal status which means that business owners are liable for all business debts
Define business plan
a plan for the development of a business, giving details such as the products to be made, resources needed and forecasts costs such as costs, revenue and cash flow
Define cash flow forecasts
the prediction of all expected receipts and expenses of a business over a future time period which shows the expected cash balance at the end of each month
define cash inflow
the flow of money into a business
define cash outflows
the flow of money out of a business
Define net cashflow
the difference between the cash flowing in and the clash flowing out of a business in a given time period
What are the three internal sources of finance?
owners capital
Selling assets
Retained profit
Explain owners capital as an internal source
the money the owner has put into the business often from personal savings
-used most commonly by sole traders &partnerships ->don’t need large amounts
Whats an advantage of using owners capital?
easy to access
Doesn’t need to be paid back
What is a disadvantage of owners capital?
amount of finance raised is limited
As depends on personal wealth of owner
Explain selling assets as a source of finance
When businesses sell their assets to generate capital
Only appropriate for businesses with spare assets to sell, not for new/very efficient businesses
What’s an advantage of selling assets?
don’t have to pay back interest so a cheap source of finance
What is a disadvantage of selling assets?
business no longer owns the asset -> can take a long time to sell and get cash
May lose value so loss of cash.
Explain what is meant by retained profit?
profit retained over a long time to be invested
Not suitable for new businesses
Not often used on its own to fund expansion
whats an advantage if retained profit?
not pay back interest on source of finance
Whats a disadvantage of retained profit?
limited
Can miss out on investment opportunities
Shareholders not in favour as less for dividends
what are the external sources of finance?
family and friends
Banks
Peer to peer funding
Business angels
Crowd funding
Other businesses
explain family and friends as a source of external finance
owners ask family/friends to help them out financially
+ of using family and friends as an external source
flexible repayment often with little or no interest
- of using family and friends as an external source
the amount of money is limited and can place a strain on the relationship
explain using banks as an external source
give different methods of Finance like loans, overdrafts and mortgages
+ of using banks as an external source
recognised financial institutions so terms and conditions are clear
Offer advise to a business and provide other services like completing financial decisions
- of using banks as an external source
have strict lending criteria
Hard to get for start ups/risky businesses
explain peer to peer lenders as an external source
Operate online and allow individuals to lend money to other individuals
Lenders say how much money they are willing to lend and indicate a rate of interest
Borrowers say how much money they want to borrow and give info about why they need it & how long the loan will last
The company then assesses how risky the borrower is and matches with appropriate lenders
What’s an advantage of peer to peer lending?
Lower rate of interest than a bank
Attractive to those who haven’t been approved by banks
explain business angels as an external source
BA are wealthy individuals who invest money into new or innovative businesses that they think have the potential to be successful
Offer advise, and guidance in return for shares of the business
whats an + of business angels?
BA have lots of business knowledge and useful contacts
whats a - of using business angels?
time consuming to find
Shares given -> to much control of business and its decisions
Explain crowd funding as an external source?
raising money from a large number of people
Each person contributes a small amount but collectively is enough to raise a large amount
Common for start ups
Business puts details of idea for money onto a crowdfunding website e.g. Kickstarter, public so anyone can contribute
Rewards are sometimes offered for donations
Whats an + of crowdfunding?
raises awareness of its product and brand
May increase sales
what a - of crowd funding?
business risks its idea being copied
If it fails, more people will be more aware -> negatively affect reputation
explain other businesses as an external source
a business w large retained profit invest in another business rather than save for their profit
If bank interest rates are low
Might offer to a firm which will aid its success e.g. Consumer Investing in supplier -> improve supplier-buyer relationship
Whats a - of other businesses as an external source?
business will want share in business -> gain some control & influence decision making
what are some short/mid term methods of Finance?
overdrafts
Leasing
Grants
Trade credit
What are some long term methods of Finance?
loans
Share capital
Venture capital
Whats an advantage of using overdrafts?
easy to arrange and flexible
Only pay interest on the amount of overdrsft they actually use
what a - of using overdrafts?
Banks charge high rates of interest on them
May be a fixed charge so unsuitable for long term
What is a + of leasing?
don’t have to pay an upfront large sum
Maintainence and repair costs are included
What is a disadvantage of leasing?
more costly in the long term than buying outright
What is a grant?
a fixed sum of money given to a business often by a government, given to fund specific projects
Need to apply and supply lots of information about financial position & the project
Whats an advantage of grants?
doesn’t have to be paid back
No interest and no share of the business is given
Application forces business to think thoroughly about how the money will be spent
what is a disadvantages of grants?
application process is time consuming & risk of not succeeding
Strict criteria about how the money is spent
Often gets at the end of a project so needs other source until paid
What is trade credit?
when a business buys a good and doesn’t have to pay straight away, they will pay it back within an agreed time limit usually 30-90 days
what’s an advantage of trade credit?
helps with cash flow
what is a disadvantage of trade credit?
missing out on discounts for paying up front
If fail to pay on time, problems can arise e.g. Interests charged, fee charged, bad credit rating
explain loans as a method of finance?
a fixed amount of money borrowed within a time period and paid back with interest
Come from different sources like banks, family, peer to peer lenders
Security is needed to get a loan often in form of property, lender can take possession if fails to pay back
Good for a start up and for paying for assets
whats an advantage of loans?
Only has to pay back loan and interest, provider won’t own any of the business
What’s a disadvantage of loans?
Can be difficult to arrange as lender needs to think about how risky it is
If the businesses doesn’t own property or assets that can be used for security, might not get loan back
Explain share capital as a method of finance?
private and public limited companies can use this method,
Only used to raise big sums as selling shares is costly and tine consuming
What’s an advantage of using share capital?
money doesn’t needed to be repaid and new shareholders can bring new expertise into the business
Good for raising large sums
what’s a disadvantage of using share capital?
original owners no longer own all of the business
Shareholders expect to get a share of the profits as dividends
Also want a say in the business
Explain venture capital as a method of finance?
money that can be used as a method of finance for a business that is high risk but has the potential to succeed
Can be for expansion or a start up
Provided by a business angel or professional employees working on the behalf of a venture capital firm
In return get shares in business, can get a big say in how the business is run ->money not repaid
whats an advantage of venture capital?
doesn’t need to be repaid
Benefit from expert advice
What is a disadvantage of venture capital?
VC more interested in established businesses, less likely to gain if a. Start up
May lose control of business due to giving shares to the investor
Explain what unlimited liability means for a business Inc, incorporated
Business and Owner are seen as one under the law, in sole traders and partnerships
Debts of the business become the personal debts of the owner
May have to sell personal assets to pay of business debts
explain what is meant by limited liability, inc unincorporated
owners and business are seen seperately under the law
So business debts are just business debts
Shareholders of plc &Ltd have limited liability as they have a seperate legal identities, most they can lose if the money invested in the business
How can liability affect the source and method of finance?
easier to encourage ppl to invest in businesses with limited liability as more willing to only lose money invested
-ST and partnerships rely on internal sources of finance and external that doesn’t involve the source provider becoming a part owner
-limited companies can raise lots through share capital but unlimited liability cant due to having limits of the amount of money that the firm can persuade to invest in the business
-however, can be easier for firms w unlimited liability to raise finance than firms w LL, less risky as they know due to the business being small lenders are likely to get their money back
