2.1 Raising Finance Flashcards
forms of internal finance
owners capital: personal savings
retained profit
sale of assets
sources of external finance
family and friends
banks
peer to peer funding
business angels
crowd funding
other businesses
methods of finance
loans
share capital
venture capital
overdrafts
leasing
trade credit
grants
peer to peer funding
refers to a lending or investment model where individuals directly provide funds to other individuals or businesses without involving traditional financial institutions
pro
-lower costs as no intermediaries
-accessibility as it provides opportunities for individuals and small businesses who have difficulty accessing traditional funding sources
-diversification - businesses can attract a diverse range of individuals investors who may be interested in supporting their venture
cons
-uncertain reputation and credibility
-limited loan amounts - may not be suitable for businesses requiring large loan amounts - individual lenders often offer small sums
-higher interest rates - depending on the business’s creditworthiness, ptp loans may carry higher interest rates
business angels
private individuals who provide capital, typically in the form of equity investment, to early-stage or startup businesses in exchange for ownership or a share of the company
pros
-financial support - crucial funding to startups cuz traditional hard to get
-industry experience - often bring valuable industry knowledge
-flexibility - BA can be more flexible than institutional investors
cons
-equity dilution - may need to give up sig ownership
-limited resources - may not have same lvl of financial resources as venture capital firms
potential conflicts - difference in vision and decision making can lead to conflicts
family and friends
individuals who provide personal financial support to entrepreneurs or businesses
pros
-accessibility - faf are more willing to provide financial support
-trust and support - already existing relationship - moral and emotional support
-flexible terms
cons
-strained relationships - mixing personal with business can strain relationships if business faces challenges or disagreements
-lack of expertise - faf may not possess the necessary business knowledge or experience to provide valuable guidance
-limited resources - financial resources of faf may be limited - restricts amount of funding available for businesses growth or expansion
banks
financial instituitons that provide various financial services like loans, credit lines, or other
pros
-access to capital - they have a lot of financial resources
-offer short term like overdrafts and long term finance like loans or mortgage
-banks often give advice and guidance to businesses that use their services
cons
-business plan usually required
-can be cautious lending to new businesses
-interest
-larger amounts may require security like holding onto an asset to be granted a loan
crowd funding
allows businesses to access finance provided by a large number of small investors on online platforms like Kickstarter
pros
-broad access to finance - tap into large pool of potential investors or contributors from diverse backgrounds and locations
-marketing and exposure - crowdfunding campaigns can create buzz, raise awareness, and attract media attention leading to more investors
cons
-high competition - highly competitive
-time and effort - requires significant time, effort, and resources for planning
-all or nothing model - many programs have this - if fundraising goal is not met within time frame, business may not receive any funds - can cause delays
other business
may be possible for business access finance via a joint venture another business
pros
-can pool resources
-market expansion - collaboration leads to entering new markets and reach border customer base
-risk mitigation - sharing risk and responsibilities
cons
-alignment of interests - could pose a challenge
-information sharing - sharing of sensitive information and intellectual property
-integration complexity - different systems, organization structures, complex and time consuming
loans
borrowed funds by a lender to a borrower usually with expectation of repayment with interest
pros
-access to capital
-financial flexibility
-building credit history
cons
-interest and costs
-repayment obligations
-qualification and requirements
share capital
act of distributing or dividing the ownership of a company among many individuals or entities
pros
-increasing funding - by selling shares
-risk sharing - capital is shared among multiple owners - risk associated with the business are distributed, reduces individual burden and potential loss for each shareholders
-diversified expertise
cons
-dilution of ownership - new shares –> existing ownership percentage decreases diminishing control and decision making power
-loss of autonomy - sharing capital requires company to involve shareholders to decision making processes - lead to conflicts of interest or differences in strategic vision
venture capital
funds provided by specialist investors in small to medium sized businesses that have significant potential for growth
pros
-substantial funding - provide significant capital to fuel growth and developments of startups and high potential businesses
-industry expertise and guidance - often bring valuable industry knowledge, experience, and mentorship to help business to succeed
-validation and credibility - securing VC can act a stamp of approval and lending credibility to the business allowing for additional investors
cons
-equity dilution - requires business to give up portion of ownership and control
-high expectations and pressure - expect high returns on their investments and often have aggressive growth - pressure for rapid growth
-loss of autonomy - with venture capital founders and investors may have different goals and perspectives
overdrafts
arrangement for business current account holders to spend more money than it has in their account - limit is agreed and interest is charged only when a business goes overdrawn
pros
-short term cash flow management - help businesses manage short-term cash flow gaps by having immediate access to additional funds
-flexibility - overdrafts offer businesses the flexibility to use funds as needed without specific purpose
-cost effective for short term needs - only charge interest on the overdrawn amount and for duration its utilized making them cost effective
cons
-interest and fees
-potential dependency - heavily relying on it can indicate financial instability
-risk of default - if overdrawn limit is exceeded or account holder fails to repay overdraft - result in additional feeds, damage credit score, and legal consequences
leasing
contractual arrangement where business obtains right to use an asset in exchange for regular payments over a specified period
pros
-cost efficient - allows business to gain access to assets without need for large upfront capital investment
-flexibility - lease terms can be structured to meet business needs
-maintenance and support - lessor may be responsible for maintenance, repairs, and support, in many agreements relieving businesses from such burdens
cons
-long term cost
-limited control and customisation
-obligations and risks - failure to adhere to terms could lead to penalities and legal consequences
trade credit
agreement is made with suppliers to buy raw materials, components, and stock which are paid for at a later date (usually 30-90 days later)
pros
-cash flow management - provides businesses with opportunity to manage cash low by delaying payment for goods and services
-relationship building - regular use of trade credit can help build strong relationship with suppliers - lead to benefits like favorable pricing, discounts, or extended credit terms
cons
-potential costs - may charge interest or fees especially if payment extended beyond standard periods
-dependency on suppliers - reliance on trade credit from limited number of suppliers can create dependency on their willingness to provide credit - risky
-creditworthiness and impact on credit score - need to maintain good credit history for access to trade credit
grants
non repayable funds or financial assistance provided by gov
pros
-free funding
-support for innovation and growth
-credibility and validation - signals recognition and support which can attract additional investors, customers, and partners
cons
-competitive process - availability of grants may be limited
-compliance and reporting requirements - need to comply with specific terms and project monitoring, conditions, and reporting obligations which can involve administrative burdens and time investment
-restrictive use of funds - often come with restrictions on how funds can be used - requires businesses to adhere, limiting flexibility in resource allocation
what are the implications of limited liability
protection of personal assets
risk mitigation - shield owners from being personally responsible
investor appeal - can make business structure more attractive to investors as personal assets are safe guarded
what are the implications of unlimited liability
personal liability - personally responsible for all debts, losses, and legal claims against business
higher risk exposure - increases personal financial risk for business owners
limited investor confidence - may be more hesitant to invest in businesses with unlimited liability structures due to increased risk
finance appropriate for limited liability
bank loans - generally more likely to qualify for traditional bank loans as lenders have a greater sense of security
venture capital - often prefer investing bcz of protection and potential for higher growth and return
finance appropriate for unlimited liability
personal savings and assets - rely more heavily on personal savings, loans, and personal assets to finance the business
friends and family - more willing to lend money
crowdfunding or peer to peer lending - more accessible without requiring extensive credit checks or collateral
what is the relevance of a business plan in obtaining a loan?
shows viability
financial projections
strategic roadmap - goals, strategies, target market, comp advantages
risk assessment
whats a cash flow forecast good for
involves analyzing projected inflows and outflows
planning and decision making
cash management
financial health assessment
limitations of cash flow forecast
uncertainty and accuracy
timing and timing differences
external factors
