2.1 - Raising Finance

Question 1

What is Owner’s Capital?

Answer 1

The business Owner’s personal savings.
It is Internal Finance.

Question 2

What are the advantages of Owner’s Capital?

Answer 2

No interest payments are necessary.
It is quick and easy to access.
Doesn’t require the borrowing of money.

Question 3

What are the disadvantages of Owner’s Capital?

Answer 3

The Owner may not have enough finance for what is needed or they may need the cash for personal use.
Once the money is gone, it is gone.

Question 4

What is Retained Profit?

Answer 4

Profit gained from a business and kept to one side to be reinvested.

Question 5

What are the advantages of Retained Profit?

Answer 5

It is quick and easy to access.
No interest payments to make.
Could be a lot if the business is doing well.

Question 6

What are the disadvantages of Retained Profit?

Answer 6

Lack of future security - Once the money has been used up by the business, it is gone and therefore cannot be used for any unforeseen problems the business may face later on.

Question 7

What is Sale of Assets?

Answer 7

Selling products owned by the business.

Question 8

What are the advantages of Selling Assets?

Answer 8

Selling an asset may create more room for a new, more efficient asset.
Can be quick to sell depending on the asset.
Useful if the asset is unused.

Question 9

What are the disadvantages of Selling Assets?

Answer 9

The asset likely won’t be sold for full market value.
The asset may not sell.
The asset might be needed in the future.

Question 10

What are the advantages of using Family and Friends as a source of finance?

Answer 10

Low interest rates (if any).
The money given may not need to be paid back.

Question 11

What are the disadvantages of using Family and Friends as a source of finance?

Answer 11

Money may be lost if the business fails.
Arguments may occur between family members.

Question 12

What is peer-to-peer funding as a source of finance?

Answer 12

Peer-to-peer funding (P2P) is when people lend money to individuals or businesses. The lender receives interest and gets your money back when the loan is repaid.

Question 13

What are the advantages of P2P as a source of finance?

Answer 13

P2P usually has lower interest rates offered than banks, etc.
Quicker to obtain funding than it is via a bank.

Question 14

What are the disadvantages of P2P as a source of finance?

Answer 14

Cost - P2P lending platforms may incur fees.
P2P lending may not be available in the necessary area.

Question 15

What is a business angel as a source of finance as a source of finance?

Answer 15

An investor in a business usually in exchange for shares/equity in a business.

Question 16

What are the advantages of a business angel as a source of finance?

Answer 16

Relatively quick to organise if the business has a strong business plan.
Business angels provide skills, expertise, contacts, and other supports.

Question 17

What are the disadvantages of a business angel as a source of finance?

Answer 17

Usually involves selling a significant stake in the business - a lack of control.
The business angel will often want close involvement in any decision making.

Question 18

What is Crowdfunding as a source of finance?

Answer 18

It usually involves raising finance by having many people ‘investing’ on specific online platforms.

Question 19

What are the advantages of Crowdfunding as a source of finance?

Answer 19

It is relatively quick and easy to set up a campaign online.
Business is in full control of what is offered.
A way to raise finance and generate publicity at the same time.

Question 20

What are the disadvantages of Crowdfunding as a source of finance?

Answer 20

Lot of other businesses wanting to raise finance through Crowdfunding - competition.
Fees - the Crowdfunding platform will take a percentage of the amount raised.
Competitors can easily learn more about your business if you are showing your future projects/plans.

Question 21

What are the advantages of Loans as a method of finance?

Answer 21

Easy and quick to access with a strong business plan.
Can get a very significant amount of money at once.

Question 22

What are the disadvantages of Loans as a method of finance?

Answer 22

Interest has to be paid on top on the loan repayments.
It is only a short term solution.

Question 23

What is Share Capital as a method of finance?

Answer 23

Share capital is the money invested in a company by the shareholders.

Question 24

What are the advantages of Share Capital as a method of finance?

Answer 24

You can gain a lot of money quickly depending on how many shares are sold.

Question 25

What are the disadvantages of Share Capital as a method of finance?

Answer 25

The business gives away part of the business.
Leaves a business open to takeovers.
The business has to pay shareholders dividends.

Question 26

What is Venture Capital as a method of finance?

Answer 26

A form of equity finance.
Invest in a wide variety of businesses.
Investments made by professional, sophisticated investors.

Question 27

What are the advantages of Venture Capital as a method of finance?

Answer 27

Could be a very high amount.
A sign of confidence in the business if backed by venture capital funds.
Business gets access to professional support.

Question 28

What are the disadvantages of Venture Capital as a method of finance?

Answer 28

Usually results in a loss of control.
Venture capital finance is often a mix of shares and loans, giving investors greater control & influence.
Expensive and time consuming to raise finance.

Question 29

What is an Overdraft as a method of finance?

Answer 29

An overdraft is really a short-term facility - the bank lets the business “owe it money” when the bank balance goes below zero

Question 30

What are the advantages of Overdraft as a method of finance?

Answer 30

Relatively easy to arrange.
Interest only paid on the amount borrowed under the facility.

Question 31

What are the disadvantages of Overdraft as a method of finance?

Answer 31

Can be withdrawn at short notice
Interest charge varies with changes in interest rate
Higher interest rate than a bank loan

Question 32

What is Leasing as a method of finance?

Answer 32

Leasing is a form of renting an asset, giving beneficial use of the asset without owning it.

Question 33

What are the advantages of Leasing as a method of finance?

Answer 33

Owner (lessor) carries the risk.
Lower interest rates than a bank loan.

Question 34

What are the disadvantages of Leasing as a method of finance?

Answer 34

Overall may be more expensive than buying an asset outright.
Some long-term leasing contracts may be difficult to cancel.
A deposit may be needed upfront.

Question 35

What is Trade Credit as a method of finance?

Answer 35

Amounts owed to suppliers for goods & services supplied on credit and not yet paid for.

Question 36

What are the advantages of Trade Credit as a method of finance?

Answer 36

Effectively ‘free’ finance.
Flexible as the business decides when to pay.
Commonly available & expected.
Often significant.

Question 37

What are the disadvantages of Trade Credit as a method of finance?

Answer 37

Wrong to abuse supplier goodwill.
Costs added if not payed for so long.

Question 38

What is a Grant as a method of finance?

Answer 38

One-off cash payments to businesses from government or other organisations. Often designed to support activities (e.g., innovation), help businesses set up or get advice, or to encourage investment in specific markets / locations.

Question 39

What are the advantages of Grants as a method of finance?

Answer 39

Normally no repayment of the grant if the conditions are met.
No impact on business control/ownership.

Question 40

What are the disadvantages of Grants as a method of finance?

Answer 40

Not widely available for most businesses.
Often time-consuming to apply for a grant, with no guarantee of success.

Question 41

What is Limited Liability?

Answer 41

When the business owner or owners are only responsible for business debts up to the value of their financial investment in the business.

Question 42

What is Unlimited Liability?

Answer 42

When the business owner or owners are personally responsible for all the debt of the business, no matter what the value.

Question 43

What finance is appropriate for businesses with Unlimited Liability?

Answer 43

Small loan – Businesses with unlimited liability will still be able to take out loans.
Overdraft – Small businesses may take out an overdraft.
Venture capital – Start-up businesses may use this source as a way to get business angels on board with the business and use their business knowledge.
Leasing – Small businesses may lease equipment if they cannot afford to buy it.
Trade credit – Smaller businesses may use trade credit so they are able to sell their goods before having to pay suppliers.
Grants – Sole traders and partnerships may be eligible to receive grants.
Owner’s capital – Sole traders and partnerships are likely to use owner’s capital as a source of finance to reduce the amount of debt that they may acquire.

Question 44

What finance is appropriate for businesses with Limited Liability?

Answer 44

Retained profit – They are likely to use it to invest in big business projects such as expansion.
Sale of assets – PLC’s and LTD’s are likely to have a large number of assets, some of which they may not need.
Loans – Large businesses will be able to take out big loans due to the big reputation that they have.
Share capital – PLC’s and LTD’s are able to sell shares in their business.
Overdrafts – This may be a source of finance used if the business has a business has a low acid test ratio and therefore cannot pay some of its current liabilities.
Leasing – Large businesses may lease equipment if it is only needed for a short period of time.
Trade credit – Businesses may use trade credit if they want to improve their cash flow.
Grants – The government is much more likely to give grants to larger businesses due to the large number of jobs that they offer.

Question 45

Why is a business plan relevant when trying to obtain finance?

Answer 45

A business plan helps to sell the opportunity to invest in your business to potential funders. Therefore, it’s crucial to have a compact and realistic plan that clearly communicates your company’s objectives, financial performance and strategy.

Question 46

What are the uses of a cash-flow forecast?

Answer 46

A cash flow forecast is a vital tool for a business because it tells the business if they have enough cash to run or expand. It also shows when more cash is going out of the business than in, allowing the business to plan ahead, e.g., if they may need to raise finance in a certain month.

Question 47

What are the limitations of a cash-flow forecast?

Answer 47

Cash flow forecasting can be misleading and may not produce the expected results. Entrepreneurs may encounter a number of problems when planning cash flow, such as failing to correctly estimate future customer demands and overestimating sales of new products.