2.1 Raising Finance

Question 1

What is peer to peer lending

Answer 1

Involves people lending money to unrelated individuals or peers and therefore avoid the use of a bank

Question 2

What are business angels?

Answer 2

Individuals who typically may invest between £10k-100k+ often in exchange for a stake in a business

Question 3

What is a crowd funding?

Answer 3

Individuals lend money to others with previous knowledge of them, banks are excluded

Question 4

What is a debenture?

Answer 4

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

Question 5

what is retained profits?

Answer 5

the cash thats generated by the business when it trades profitably

Question 6

what is share capital?

Answer 6

Money invested in a company by the shareholders.

Question 7

what is a bank loan?

Answer 7

long-term finance, normally for 1-25 years. Bank loans are generally at a lower rate of interest. they don’t provide flexibility.

Question 8

what is a bank overdraft?

Answer 8

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.

Question 9

what is share capital from outside investors?

Answer 9

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

Question 10

what is a venture capital?

Answer 10

type of private equity financing that funds startups, and emerging companies that have high growth potential.

Question 11

Credit cards as a source of finance?

Answer 11

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)

Question 12

savings as source of finance

Answer 12

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

Question 13

re-mortgaging as a source of finance?

Answer 13

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

Question 14

borrowing from friends and family

Answer 14

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.

Question 15

what is debt factoring

Answer 15

a business can raise cash by selling their outstanding sales invoices (receivables) to a third party (a factoring company) at a discount.

Question 16

What is a business plan?

Answer 16

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

Question 17

Content of a business plan designed to raise finance?

Answer 17

• 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

Question 18

Why is cash flow important?

Answer 18

• Cash flow is unpredictable
• Cash flow problems are the main reason for business failure
• Updated cash flow forecast can address problems

Question 19

Examples of cash inflows

Answer 19

• Cash sales
• Interest on bank balance
• Sale of fixed assets
• Grants
• Loans from the bank
• Share capital invested

Question 20

Examples of cash outflows

Answer 20

• Payment to suppliers
• Wages and salaries
• Payments for fixed assets
• Interest on loans and overdrafts
• Dividends paid shareholders
• Repayment of loans

Question 21

Why produce a cash flow forecast

Answer 21

• 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

Question 22

What makes a good cash flow forecast?

Answer 22

• updated regularly
• Make sensible assumptions
• Allows for unexpected changes
• Good information

Question 23

What is a cash flow problem?

Answer 23

When a business does not have enough cash to pay its liabilities

Question 24

Common problems with cash flow forecast

Answer 24

• Sales proved to be lower than expected
• Customers do not pay on time
• Costs approve higher-than-expected
• Imprudent cost assumptions