2.1 Raising Finance Flashcards
What is peer to peer lending
Involves people lending money to unrelated individuals or peers and therefore avoid the use of a bank
What are business angels?
Individuals who typically may invest between £10k-100k+ often in exchange for a stake in a business
What is a crowd funding?
Individuals lend money to others with previous knowledge of them, banks are excluded
What is a debenture?
A loan from another business. The holder of a debenture is a creditor (someone to whom the business owes money) of a company, not an owner
what is retained profits?
the cash thats generated by the business when it trades profitably
what is share capital?
Money invested in a company by the shareholders.
what is a bank loan?
long-term finance, normally for 1-25 years. Bank loans are generally at a lower rate of interest. they don’t provide flexibility.
what is a bank overdraft?
short-term finance, its used by start-ups and small businesses. Bank lets the business “owe money” when the balance goes below zero, in return for high interest. overdraft is flexible.
what is share capital from outside investors?
external investor (friends/ family) invest for a long period of time, and may not want to get involved in the day-to-day operation. Tensions may develop with family/ friends
what is a venture capital?
type of private equity financing that funds startups, and emerging companies that have high growth potential.
Credit cards as a source of finance?
Each month, entrepreneur pays for business expenses on a credit card. 15 days later the credit card statement is sent in the post, the balance is paid by the business within the credit-free period (30-45 days)
savings as source of finance
invest personal cash in a start-up. its a cheap form of finance thats available. Investing personal savings maximise the control of the business. It shows commitment to outside investors
re-mortgaging as a source of finance?
takes out a 2nd or larger mortgage on private property & invests some money in the business, to get low-cost finance. if the business fails, then property will be lost too
borrowing from friends and family
Friends/ family can provide money either to the entrepreneur or business. This can be quick and cheaper to arrange and interest/ repayment may be more flexible.
what is debt factoring
a business can raise cash by selling their outstanding sales invoices (receivables) to a third party (a factoring company) at a discount.
What is a business plan?
A document that sets out a business idea showing products, resources needed and how they are going to be marketed and forecasts of costs revenue and cash flow
Content of a business plan designed to raise finance?
- executive summary - an overview of a business, including who you are
- Product
- Market assessment, e.g. Competitors, market size, growth
- Production methods
- Financial forecasts
- Key opportunities and threats
- Investment required
Why is cash flow important?
- Cash flow is unpredictable
- Cash flow problems are the main reason for business failure
- Updated cash flow forecast can address problems
Examples of cash inflows
- Cash sales
- Interest on bank balance
- Sale of fixed assets
- Grants
- Loans from the bank
- Share capital invested
Examples of cash outflows
- Payment to suppliers
- Wages and salaries
- Payments for fixed assets
- Interest on loans and overdrafts
- Dividends paid shareholders
- Repayment of loans
Why produce a cash flow forecast
- Advance warning of cash shortages
- ensures that the business can afford to pay suppliers and employees
- Spot problems with customer payments
- Provides reassurance to investors and lenders for the business is being managed properly
What makes a good cash flow forecast?
- updated regularly
- Make sensible assumptions
- Allows for unexpected changes
- Good information
What is a cash flow problem?
When a business does not have enough cash to pay its liabilities
Common problems with cash flow forecast
- Sales proved to be lower than expected
- Customers do not pay on time
- Costs approve higher-than-expected
- Imprudent cost assumptions
