2.1 raising finance Flashcards
which sources of finance are long term?
-share capital
-retained profit
-venture capitalists
-bank loans
which sources of finance are medium term?
-bank loan
-grants
-leasing
which sources of finance are short term?
-bank overdraft
-trade credit
-bank loans (short term)
key considerations in choosing the right sources of finance:
-how much is needed?
-when is it needed?
-what is it needed for?
-what is the cost of the finance?
which sources of finance are internal?
-retained profit
-sale of assets
-owner’s capital
-friends and family
which sources of finance are external?
-bank overdrafts
-trade credit
-grants
-leasing
-bank loans
-venture capital
-share capital
-crowdfunding
-debentures
-peer to peer lending
what is retained profit?
business’s income that is kept within its accounts for later use
advantages of retained profit
-no interest → cheap source
-very flexible
-do not dilute the ownership of the business
disadvantages of retained profit
-danger of hoarding cash
-shareholders may wish to receive it in the form of a dividend
what is sale of assets?
(+ examples)
a business sells what it owns (assets) that it doesn’t need anymore
eg: spare land, surplus equipment
advantages of sale of assets
-money from valuable unwanted assets can be invested in other areas of the business
-can be a quick, one off boost to finance
disadvantages of sale of assets
-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
what is owner’s capital?
the investment that business owners make in their company
advantages of owners capital
-no interest
-doesn’t dilute ownership
-quick
-flexible & can be added when needed
disadvantages of owner’s capital
owners could lose their personal investment
what is finance from friends and family?
finance that family and friends have given to a business owner
advantages of finance from friends and family
-may not have to pay interest
-may be free
disadvantages of finance from friends and family
-the amount of may not be sufficient
-can strain relationships
what are the main sources for a start up business?
-owner’s capital
-friends & family
-bank loan
-business angels
-grants
why are personal sources important to a start up business?
-they are cheap
-the entrepreneur keeps more control over the business
-the more the founder puts in, the more others will invest (added confidence)
what are bank loans?
a sum of money borrowed from a bank
what period is a loan provided over?
a fixed period
what can the rate of interest be on a bank loan?
fixed or variable
how do repayments happen with business loans?
the timings and amounts of repayments are set between the lender and borrower
advantages of bank loans
-lower interest rate than a bank overdraft
-good for financing investment in fixed assets
-can be negotiated to meet business requirements
disadvantages of bank loans
-require collateral
-more difficult to arrange than an overdraft
-not that flexible
-interest
what are bank overdrafts?
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
advantages of a bank overdraft
-relatively easy to arrange
-flexible → use as cash flow requires
-no collateral that could compromise assets
disadvantages of a bank overdraft
-interest charge varies with changes in interest rate
-higher interest rate than a bank loan
what is share capital?
a company issues new shares on the stock market, shareholders buy the shares, the company has more cash due to the shareholders
(the money invested in a company by the shareholders)
advantages of share capital
-able to raise substantial funds
-no interest
-equity rather than debt = lower risk finance structure
disadvantages of share capital
-only available to ltd and plcs
-can be time consuming
-ownership can be diluted
-some profits must be paid as dividends
what are debentures?
a form of long-term loan
how long are debentures issued for?
often 10 - 20 years
who issues debentures?
governments &
what is the interest rate of debentures?
fixed rate of interest
do debentures have collateral?
no, they are unsecured by collateral
methods of raising capital
-loans
-share capital
-venture capital
-overdrafts
-leasing
-trade credit
-grants
sources of finance:
-family and friends
-banks
-peer-to-peer funding
-business angels
-crowd funding
-other businesses
what is a venture capitalist?
a specialist investor in a private company
what do venture capitalists expect when investing?
high rates of returns
what size of investments do venture capitalists usually rely on?
larger investments, more than £1 million
do venture capitalists keep their investments forever?
no, they look to sell their investment in the medium-term (e.g. 5-7 years)
advantages of venture capitalists
-can raise substantial amounts
-business benefits from specialist investor support & expertise
disadvantages of venture capitalists
-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
what is trade credit?
an arrangement to buy goods or services without making immediate payments: buy now, pay later
advantages of trade credit
-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)
disadvantages of trade credit
-risk of ruining relationship with supplier of credit terms aren’t met
-large fine if you breach after credit terms
what is peer to peer funding/lending?
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)
advantages of peer to peer lending
-cuts out the role traditionally played by banks → quickly & convenient
-attractive interest rates if you have a good credit score
disadvantages of peer to peer lending
-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
what is crowdfunding?
the use of small amounts of capital from a large number of individuals to finance a new business venture
advantages of crowdfunding
-helps businesses to grow their audience
-does not dilute ownership
-relatively easy to set up a campaign
disadvantages of crowdfunding
-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
what are grants?
a sum of money awarded to a business to help it grow and develop
who usually awards a grant?
government, local council
advantages of grants:
-non repayable, no interest → free
-doesn’t dilute ownership
disadvantages of grants
-time consuming process (application, risk of rejection)
-you must match the conditions of the grant to get it
what is leasing?
a contractual arrangement calling for the user to pay the owner for the use of an asset
advantages of leasing
-helps with budgeting
-in most cases the payments are fixed
disadvantages of leasing
-the leasee does not own the asset
-leasing can be more expensive in the long run
what is limited liability?
the owner and the business have different legal identities,
do shareholders lose their assets with limited liability?
personal assets of shareholders are protected
shareholders losses are limited to how much they invested into the company
who are businesses with limited liability owned by?
shareholders
definition of shareholders
an individual or institution that owns a percentage of a company
how do shareholders in a company impact decision making?
-a shareholder with a share over 50% can decide company policy
-a shareholder with a 10% share can vote at the AGM
how are dividend amounts chosen?
a shareholder who has a 10% share of the company is entitled to 10% of any profits paid via dividends
which two ways do shareholders benefit from shares?
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
why do limited liability businesses obtain large amounts of capital easily?
the sources available to them are capable of raising large amounts
what is unlimited liability?
the owner and the business have the same legal identity
what does unlimited liability mean for assets?
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
which businesses are unlimited liability businesses?
-sole trader (one owner)
-partnership
how to remember which businesses are unlimited liability businesses:
UNlimited = UNincorporated
which businesses are limited liability businesses?
LTD - private limited company (sells shares to family & friends)
PLC - public limited company (offers shared to the public)
sources of finance for limited liability businesses:
-share capital
-retained profit
-venture capital
-business angels
-bank loans
sources of finance for unlimited liability businesses:
owner’s capital
retained profit
unsecured bank loans
peer-to-peer lending
crowd funding
grants
bank overdrafts
what is a business plan?
a written document that describes your business
what should a business plan contain?
-executive summary
-business idea and opportunity
-aims and objectives
-market research
-financial forecasts
-sources of finance
-premises and equipment
-personnel
-buying and production
executive summary
a one-page overview of the business
business idea and opportunity
an outline of the business idea and concept so stakeholders can understand the owner’s intentions
aims and objectives
aims and objectives should be SMART, the owner will measure their success against these targets
market research
market research into the target market, the market and competitors
financial forecasts
forecasts on costs, revenue, profit and cash flow
sources of finance
how the business will be financed and how any borrowings will be repaid
premises and equipment
location of the business and its reasoning. how this will be financed and any other equipment the business will need.
personnel
organisation chart outlining the personnel in the business, their areas of responsibility, skills and qualifications
buying and production
how the product will be produced including details of suppliers
who uses a business plan?
-owners
-lenders
-investors
how do owners use a business plan?
as a guide and working document
how do lenders use a business plan?
banks will want to investigate the likely success and risk of lending to a new business
how do investors use a business plan?
to assess the risk and reward of investing in the business
the relationship between planning, risk and success
business planning reduces risk associated with unforeseen problems and poor decision-making and increases the likelihood of success
what is a cash flow forecast?
a prediction for the cash inflows and outflows of a business
what three sections are a cash flow forecast usually made of?
-cash in
-cash out
-net cash flow
how to calculate net cash flow
inflows - outflows
how to calculate opening balance
closing balance from the last month
how to calculate closing balance
opening balance + net cash flow
what should be looked for when analysing cash flow forecasts?
-are inflows greater than outflows?
-are inflows increasing over time?
-is there a seasonal trend?
-do we have enough cash reserves?
what does it mean when a number is surrounded by brackets?
negative number
main causes of cash flow problems:
-overtrading
-allowing too much trade credit to
customers
-unforeseen costs
2 main ways to improve cash flow:
1) increase inflows
2) decease outflows
how do you increase/speed up inflows?
-increase sales volume
-increase selling prices
-reduce trade credit given to customers
-sell off stock
-inject fresh capital into the business.
how do you decrease/slow down outflows?
-delay payments to suppliers
-increase trade credit agreements with suppliers
-find different suppliers
benefits of cash flow forecasting
-advanced warming of cash shortages
-make sure business can afford to pay suppliers & employees
-spot problems with customer payments
-reassured investors and lenders
issues with cash flow forecasts
-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
what is a cash flow problem
when a business doesn’t have enough cash to pay its liabilities
insolvency
business runs out of cash and can’t pay debts
