2.1 Raising Finance Flashcards
explain the need for finance
capital expenditure- spending on items that may be multiple times (machinery, vehicles)
revenue expenditure- payments for goods/services that have already been consumed or will be soon (wages, raw materials, repairs)
capital = the money provided by the owners in a business
types of internal finance
(money generated by the business/ current owners)
owners capital- money from own personal resources
retained profit: profit afire tax that is put back into the business.
sale of assets: sale of unwanted assets (machinery, obsolete stock, parts of organisation
sale and leaseback: selling an assert that business still needs but sold to company that leases the asset back to the seller
advantages of internal finance
capital is available immediately, not time delay between identifying need for finance and obtaining it
cheap- not interest payments = lower costs and higher profit
not subject to credit checks - external finance requires investigation into credit history of the borrowers
disadvantages of internal finance
limited - business may not be sufficiently profitable to use retained profit and not want to sell assets
inflexible compared to external sources - wide external options that give the business flexibility
opportunity costs can be high: PLC will have to consider the reactions of the shareholders if dividend are frozen or cut. result in conflict
sources of external finance
family and friends
peer to peer lending: lending money to unrelate d individuals and therefore avoiding the use of banks. transactions are done online. -
loans are insecure= no protection for lenders
+ interest rates are better for both borrowers and lenders than those offered by banks
business angles: individuals who invest in exchange for a stake in the business.one or two investments in a 3 year period. for stat ups or businesses in expansion
crowdfunding: individuals lend money to others. tend to be businesses or group s who are involved in a particular venture.
bank: provide a range of different external funding agreements + necessary to provide a business plan
external methods of finance
VENTURE CAPITAL: specialists in the provision of funds for small and medium businesses. invest after the initial start up. take a stake in the company = entitled to a sure in the profit and have control. business turn to venture capitalists when refused by other sources
BANK OVERDRAFT: business can spend more money than it has in the account. agree on a limit and interst charge only when overdrawn (>depends on the needs at the time). Bank has right to call in money owed at any time (if bank thinks business is struggling)
LEASING: contract which business acquires the use of resources such as property machinery or equipment in return for regular payments
+ no large sums of money are needed to buy use of equipment
+ no responsibility of resources
- long time period of leasing is more expensive than out right purchasing
TRADE CREDIT: buy materials and pay them at a later date. but companies encourage early payment by offering discounts.
- result in poor business arrangements
GRANTS: businesses may qualify for financial support
define unlimited liability
there is no legal difference between owners and the business. (unincorporated businesses). firms tend to be small
exposed to financial failure of their businesses. if collapse when owe money to external parties the owners will have to meet the debts from personal resources = forced to sell private assets
liable for any unlawful acts committed by the owners or employees
+ find it easier to raise finance, lenders will be able to get money back
+ seen as more credible because owners have to be more cautious.
finance:
personal savings
mortgage (house collateral)
crowd funding
overdraft
define limited liability
business has a legal identity separate from the owners. business sued, liquidated (not owner). Incorporated businesses
owners are shareholders = financial liability is limited to the amount invested. private assets are protected + protected from legal claims on the businesses
+ assets protected= find it easier to raise larger amounts of finance from investors. = more willing to buy shares because they know extent of liability
finance:
share capitals
debentures
retained profit
venture capitalists
factors affecting choosing finance
short term or long term:
long term= mortgages (25 years), share capital (never)
short term= trade credit, overdrafts or leasing
financial position of the business: business in a poor financial position= lenders reluctant to offer finance + cost of borrowing increases
type of expenditure:
long term = capital expenditure
short term = revenue expenditure
cost: prefer lower costs in interest rates and administration costs
legal status : limited/ unlimited liability
relevance of a business plan
show how a business will develop over time
needed to support applications for finance
aims to:
help show lenders and investors that the owner is cautious and credible, force owners to take an objective look at whole business, goals
contents:
executive summary- overview of the start up
business opportunities - description of product, quantity sold, price
financial forecasts
market
objectives
cash flow forecasts
*without cash a business cannot trade = business must ensure that have enough cash to pay staff and bills
lists all the likely recipes (cash inflows) and payments (cash outflows) over future period of time
net cash flow = inflows = outflows
use of cash flow forecasts
identifying the timing of cash shortages and surpluses
= know when to borrow cash. helpful when businesses have seasonal demand (inflows will be irregular)
supporting applications for finance- look at businesses solvency
monitoring cash flow
limitations of cash flow
based on estimates such as costs and revenue = inflow + outflow inaccurate = net cash flow + closing balance unreliable
business activity is subject to external forces that are beyond control of owners and mangers
Eg: interest rates, economy , legislation, exchange rates
focus on only one important business variable - cash. other variables are important (profit, productivity)
cannot be used on its own to elevate performace
external sources of finance
LOANS
LOANS: agreement where the amount borrowed must be repaid over a peopled of time in instalments.
- BANK LOANS : unsecured loans= no protection if the borrower fails to repay the money owed. long and short term
- MORTGAGES: secured loans where the borrowers has to provide some assets as collateral to support the loan . lender is entitled to sell the asserts to repay outstanding amount . ( purchase of premises or tare item) less risk for lender = cheaper
- DEBENTURES: holder of a debenture is a creditor of a company (not an owner) holders are entitled to a fix rate of return + fixed return fate. long term source of finance for PLC
external source of finance
share capital
SHARE CAPITAL:sale of shares can raise late amount of money.
issued share capital = money raised from sale of shares
authorised share capital= box amount of share holders want to raise
- ORDINARY SHARES: no guaranteed dividend (depend on profit made)= risky. all shareholders have voting rights
- PREFERENCE SHARE: receive a fixed rate of return when from dividend
-DEFERRED SHARES: held by founders of the company.
