2.1 Raising finance Flashcards
Internal sources of finance
-Personal Savings eg redundancy payments
-Retained profit
-Sales of assets
-Managing working capital effectively
External sources of finance
-Family & friends
-Bank loans, overdraft, mortgage
-Peer to peer funding & crowdfunding
-Business Angels
-Venture Capitalist
-Share capital
Why are personal sources important to a start up?
-Cheap
-Entrepreneur keeps control
-Little red tape/delay
-Organised quickly
Sources of finance for a limited lability business
-Retained profit
-Debentures
-Share capital
-Venture capitalist & business angels
Sources of finance for an unlimited-liability business
-Personal savings & retained profit
-Loan, overdraft, mortgage
-Trade credit & leasing
-Crowd funding & peer to peer
-Grants
Benefits of Retained profits
-Cheap
-Very flexible
-Do not dilute the ownership of the company
Drawbacks of retained profits
-Danger of hoarding cash
-Shareholders may prefer dividends if the business is not achieving sufficiently high returns on investment
-High profits and cash flow suggest the business could afford debt
Equation of working capital
Working capital = Current assests - current liabilities
How to manage working capital effectively?
-Negotiate extended payment terms with suppliers
-Incentivise customers to pay more promptly
Sales of assets
-Selling assets no longer required (machinery, land)
-Not all businesses have spare assets
Describe bank overdrafts
-Short term finance
-Bank lets a business owe it money in return for charging high rate of interest
-Flexible
-Good for handling seasonal fluctuations in cash flow or when there’s short term cash flow problems
Describe bank loans
-Long term finance (loan provided over fixed period with interest)
-Good for financing investment in fixed assets
-Lower interest rate than bank overdraft
-Not very flexible
Advantages of a bank overdraft
-Relatively easy to arrange
-Flexible (use as cash flow requires)
-Interest only paid on amount borrowed
-Aids cash flow
Disadvantages of an overdraft
-Can be withdrawn at short notice
-Interest charge varies with changed in interest rate
-Higher interest rate than bank loan
Advantages of Bank loans
-Greater certainty of funding
-Lower interest rate than a bank overdraft
-Appropriate method of financing fixed assets
Disadvantages of a bank loan
-Requires security (collateral)
-Interest paid on full amount outstanding
-Harder to arrange
Benefits of issuing shares
-Able to raise substantial funds if the business has good prospects
-Broader base of shareholders
-Equity rather than debt
-Lower risk finance structure
Drawbacks of issuing shares
-Dilutes ownership
-Take a share of profit
Define debentures
A form of long term loan which is issued by the company, usually with a fixed rate of interest
Key features of debentures
-Long term often 10-20 years
-Issued by the company not bank
-Fixed rate of interest
-May be secured against the assets of the company
-Can be traded
Describe Venture Capitalists
-Specialist investors in private companies
-Manage investment funds designed to achieve high rates of returns
-Will seek large share of share capital
Benefits of Venture capital
-Raise substantial amounts
-Business benefits from specialist investor support
-Easier to attract finance, less risk adverse
Drawbacks of Venture Capital
-Require high rate of return
-Loss of control
Describe raising finance from suppliers
-Trade credit
-As a business expands, amount owed to suppliers at any one time also grows
-Strong relationship with suppliers = able to obtain better payment terms
