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A LEVEL BUSINESS - TH > 2.1 raising finance > Flashcards

2.1 raising finance Flashcards

1
Q

which sources of finance are long term?

A

-share capital
-retained profit
-venture capitalists
-bank loans

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2
Q

which sources of finance are medium term?

A

-bank loan
-grants
-leasing

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3
Q

which sources of finance are short term?

A

-bank overdraft
-trade credit
-bank loans (short term)

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4
Q

key considerations in choosing the right sources of finance:

A

-how much is needed?
-when is it needed?
-what is it needed for?
-what is the cost of the finance?

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5
Q

which sources of finance are internal?

A

-retained profit
-sale of assets
-owner’s capital
-friends and family

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6
Q

which sources of finance are external?

A

-bank overdrafts
-trade credit
-grants
-leasing
-bank loans
-venture capital
-share capital
-crowdfunding
-debentures
-peer to peer lending

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7
Q

what is retained profit?

A

business’s income that is kept within its accounts for later use

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8
Q

advantages of retained profit

A

-no interest → cheap source
-very flexible
-do not dilute the ownership of the business

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9
Q

disadvantages of retained profit

A

-danger of hoarding cash
-shareholders may wish to receive it in the form of a dividend

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10
Q

what is sale of assets? (+ examples)

A

a business sells what it owns (assets) that it doesn’t need anymore

eg: spare land, surplus equipment

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11
Q

advantages of sale of assets

A

-money from valuable unwanted assets can be invested in other areas of the business
-can be a quick, one off boost to finance

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12
Q

disadvantages of sale of assets

A

-not all businesses have spare assets
-the amount of money made will depend on the value of the item
-the business loses the benefit of the asset

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13
Q

what is owner’s capital?

A

the investment that business owners make in their company

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14
Q

advantages of owners capital

A

-no interest
-doesn’t dilute ownership
-quick
-flexible & can be added when needed

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15
Q

disadvantages of owner’s capital

A

owners could lose their personal investment

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16
Q

what is finance from friends and family?

A

finance that family and friends have given to a business owner

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17
Q

advantages of finance from friends and family

A

-may not have to pay interest
-may be free

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18
Q

disadvantages of finance from friends and family

A

-the amount of may not be sufficient
-can strain relationships

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19
Q

what are the main sources for a start up business?

A

-owner’s capital
-friends & family

-bank loan
-business angels
-grants

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20
Q

why are personal sources important to a start up business?

A

-they are cheap
-the entrepreneur keeps more control over the business
-the more the founder puts in, the more others will invest (added confidence)

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21
Q

what are bank loans?

A

a sum of money borrowed from a bank

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22
Q

what period is a loan provided over?

A

a fixed period

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23
Q

what can the rate of interest be on a bank loan?

A

fixed or variable

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24
Q

how do repayments happen with business loans?

A

the timings and amounts of repayments are set between the lender and borrower

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25
Q

advantages of bank loans

A

-lower interest rate than a bank overdraft
-good for financing investment in fixed assets
-can be negotiated to meet business requirements

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26
Q

disadvantages of bank loans

A

-require collateral
-more difficult to arrange than an overdraft
-not that flexible
-interest

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27
Q

what are bank overdrafts?

A

a loan facility where the bank lets a business owe it money when its balance goes below zero, in return for charging a high rate of interest

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28
Q

advantages of a bank overdraft

A

-relatively easy to arrange
-flexible → use as cash flow requires
-no collateral that could compromise assets

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29
Q

disadvantages of a bank overdraft

A

-interest charge varies with changes in interest rate
-higher interest rate than a bank loan

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30
Q

what is share capital?

A

a company issues new shares, shareholders buy the new shares, the company has more cash due to the shareholders

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31
Q

advantages of share capital

A

-able to raise substantial funds
-no interest
-equity rather than debt = lower risk finance structure

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32
Q

disadvantages of share capital

A

-only available to ltd (people you know) and plc (public)
-can be time consuming
-existing shareholders’ holdings may be diluted

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33
Q

what are debentures?

A

a form of long-term loan

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34
Q

how long are debentures issued for?

A

often 10 - 20 years

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35
Q

who issues debentures?

A

governments or corporations

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36
Q

what is the interest rate of debentures?

A

fixed rate of interest

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37
Q

do debentures have collateral?

A

no, they are unsecured by collateral

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38
Q

advantages of debentures

A

-more secure than investing in shares because interest payments must be made by the company

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39
Q

disadvantages of debentures

A
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40
Q

what is a venture capitalist?

A

a specialist investor in a private company

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41
Q

what do venture capitalists expect when investing?

A

high rates of returns

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42
Q

what size of investments do venture capitalists usually rely on?

A

larger investments, more than £1 million

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43
Q

do venture capitalists keep their investments forever?

A

no, they look to sell their investment in the medium-term (e.g. 5-7 years)

44
Q

advantages of venture capitalists

A

-can raise substantial amounts
-business benefits from specialist investor support & expertise

45
Q

disadvantages of venture capitalists

A

-venture capitalist requires a high rate of return
-not a long-term investment, venture capitalist will aim to sell
-loss of control, venture capitalist may take a majority share in company

46
Q

what is trade credit?

A

an arrangement to buy goods or services without making immediate payments: buy now, pay later

47
Q

advantages of trade credit

A

-easy to arrange
-doesn’t dilute ownership
-cheap form of short term finance
-suitable for buying raw materials from suppliers (gives the business opportunity to generate revenue before having to pay)

48
Q

disadvantages of trade credit

A

-risk of ruining relationship with supplier of credit terms aren’t met
-large fine if you pay after credit terms

49
Q

what is peer to peer funding/lending?

A

a form of financial technology that allows people to lend or borrow money from one another without going through a bank (managed by online intermediaries)

50
Q

advantages of peer to peer lending

A

-cuts out the role traditionally played by banks → quickly & convenient
-attractive interest rates if you have a good credit score

51
Q

disadvantages of peer to peer lending

A

-may have to pay a higher interest rate than that charged by traditional lenders
-if you run into difficulties in repaying the loan, you may not receive the same protection as you would when borrowing through a traditional lender
-

52
Q

what is crowdfunding?

A

the use of small amounts of capital from a large number of individuals to finance a new business venture

53
Q

advantages of crowdfunding

A

-helps businesses to grow their audience
-does not dilute ownership
-relatively easy to set up a campaign

54
Q

disadvantages of crowdfunding

A

-financing is returned to investors if the funding goal isn’t reached
-lots of competition from other businesses wanting to raise finance from crowdfunding
-the crowdfunding platform will take a percentage of the amount invested
-leaking valuable information about business ideas

55
Q

what are grants?

A

a sum of money awarded to a business to help it grow and develop

56
Q

who usually awards a grant?

A

government, local council

57
Q

advantages of grants:

A

-non repayable, no interest → free
-doesn’t dilute ownership

58
Q

disadvantages of grants

A

-time consuming process (application, risk of rejection)
-you must match the conditions of the grant to get it

59
Q

what is leasing?

A

a contractual arrangement calling for the user to pay the owner for the use of an asset

60
Q

advantages of leasing

A

-helps with budgeting
-in most cases the payments are fixed

61
Q

disadvantages of leasing

A

-the leasee does not own the asset
-leasing can be more expensive in the long run

62
Q

what is limited liability?

A

the owner and the business have different legal identities,

63
Q

do shareholders lose their assets with limited liability?

A

personal assets of shareholders are protected

shareholders losses are limited to how much they invested into the company

64
Q

who are businesses with limited liability owned by?

A

shareholders

65
Q

definition of shareholders

A

an individual or institution that owns a percentage of a company

66
Q

how do shareholders in a company impact decision making?

A

-a shareholder with a share over 50% can decide company policy
-a shareholder with a 10% share can vote at the AGM

67
Q

how are dividend amounts chosen?

A

a shareholder who has a 10% share of the company is entitled to 10% of any profits paid via dividends

68
Q

which two ways do shareholders benefit from shares?

A

1) through profits returned in the form of dividends

2) in the rise of the price of the shares held when they come to sell them

69
Q

why do limited liability businesses obtain large amounts of capital easily?

A

the sources available to them are capable of raising large amounts

70
Q

what is unlimited liability?

A

the owner and the business have the same legal identity

71
Q

what does unlimited liability mean for assets?

A

the owner is responsible for all debts the business incurs, if they are unable to pay business debts to banks and suppliers
they could lose personal assets

72
Q

which businesses are unlimited liability businesses?

A

-sole trader (one owner)
-partnership

73
Q

how to remember which businesses are unlimited liability businesses:

A

UNlimited = UNincorporated

74
Q

which businesses are limited liability businesses?

A

LTD - private limited company (sells shares to family & friends)

PLC - public limited company (offers shared to the public)

75
Q

sources of finance for limited liability businesses:

A

-share capital
-retained profit
-venture capital
-business angels
-bank loans

76
Q

sources of finance for unlimited liability businesses:

A

owner’s capital
retained profit
unsecured bank loans
peer-to-peer lending
crowd funding
grants
bank overdrafts

77
Q

what is a business plan?

A

a written document that describes your business

78
Q

what should a business plan contain?

A

-executive summary
-business idea and opportunity
-aims and objectives
-market research
-financial forecasts
-sources of finance
-premises and equipment
-personnel
-buying and production

79
Q

executive summary

A

a one-page overview of the business

80
Q

business idea and opportunity

A

an outline of the business idea and concept so stakeholders can understand the owner’s intentions

81
Q

aims and objectives

A

aims and objectives should be SMART, the owner will measure their success against these targets

82
Q

market research

A

market research into the target market, the market and competitors

83
Q

financial forecasts

A

forecasts on costs, revenue, profit and cash flow

84
Q

sources of finance

A

how the business will be financed and how any borrowings will be repaid

85
Q

premises and equipment

A

location of the business and its reasoning. how this will be financed and any other equipment the business will need.

86
Q

personnel

A

organisation chart outlining the personnel in the business, their areas of responsibility, skills and qualifications

87
Q

buying and production

A

how the product will be produced including details of suppliers

88
Q

who uses a business plan?

A

-owners
-lenders
-investors

89
Q

how do owners use a business plan?

A

as a guide and working document

90
Q

how do lenders use a business plan?

A

banks will want to investigate the likely success and risk of lending to a new business

91
Q

how do investors use a business plan?

A

to assess the risk and reward of investing in the business

92
Q

the relationship between planning, risk and success

A

business planning reduces risk associated with unforeseen problems and poor decision-making and increases the likelihood of success

93
Q

what is a cash flow forecast?

A

a prediction for the cash inflows and outflows of a business

94
Q

what three sections are a cash flow forecast usually made of?

A

-cash in
-cash out
-net cash flow

95
Q

how to calculate net cash flow

A

inflows - outflows

96
Q

how to calculate opening balance

A

closing balance from the last month

97
Q

how to calculate closing balance

A

opening balance + net cash flow

98
Q

what should be looked for when analysing cash flow forecasts?

A

-are inflows greater than outflows?
-are inflows increasing over time?
-is there a seasonal trend?
-do we have enough cash reserves?

99
Q

what does it mean when a number is surrounded by brackets?

A

negative number

100
Q

main causes of cash flow problems:

A

-overtrading
-allowinhg too much trade credit to
customers
-unforeseen costs.

101
Q

2 main ways to improve cash flow:

A

1) increase inflows

2) decease outflows

102
Q

how do you increase/speed up inflows?

A

-increase sales volume
-increase selling prices
-incentivise early repayment by giving
customers a alscount for paying early.
-reduce trade credit given to customers.
-sell off stock
-Inject fresh capital into the business.

103
Q

how do you decrease/slow down outflows?

A

-delay payments to suppliers
-increase trade credit agreements with suppliers
-find different suppliers

104
Q

benefits of cash flow forecasting

A

-advanced warming of cash shortages
-make sure business can afford to pay suppliers & employees
-spot problems with customer payments
-reassured investors and lenders

105
Q

issues with cash flow forecasts

A

-variables are constantly changing and cash-flow forecasts should be updated for them to be valid
-Cash-flow forecasts focus on one variable - cash. they do not consider other important variables

106
Q

what is a cash flow problem

A

when a business doesn’t have enough cash to pay its liabilities

107
Q

insolvency

A

business runs out of cash and can’t pay debts

A LEVEL BUSINESS - TH (7 decks)

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