2.1 raising finance Flashcards
What is internal finance?
Finance comes from inside the business
What is external finance?
Finance comes from the inside
What is owners capital?
Personal savings are a key source of funds when a business starts up
What is retained profit?
The profit that has been generated in previous years and not distributed to owners is reinvested back into the business
What is sales of assets?
Selling business assets which are no longer required (machinery, land, buildings) to generate a source of finance
What is the benefit and drawback of using internal finance?
- no interest
- does not involve third parties who may want to influence business decisions
- organised quickly
- opportunity costs
- may not be sufficient
What are the advantages and disadvantages of family/friends as a source of finance ?
- cheap
- no strings attached
- relationship damaged
What is the advantages and disadvantages of bank loans ?
- short term finance
- free advice and guidance
- needs business plan
- interest
- cautious about lending
- security may need to be promised
What is peer to peer funding ?
Individuals with available savings pool it with others in a peer investment scheme
What is the advantages and disadvantages of peer to peer funding ?
- loans made quickly
- borrows are charged a small fee to access finance and pay interest in the same way as a bank loan
What is a business angel ?
Some individuals in making investments in start up or expanding businesses
What is the advantage and disadvantahge of business Angels?
- expertise more willling to take risks
- Investment is usually for a determined period of time so owners regain shares in the future
disadvantage
- finding the right business angel can be hard
- may be involved in decision making and will recieve a share of business profits
What is crowdfunding ?
Crowdfunding allows businesses to access finance provided by a large number of small investors on online platforms
What is an advantage and disadvantages of crowd funding ?
- create an organic customer base and provides free marketing
- need a persuasive business plan to convince investors
- negative publicity is project is not successful in attracting enough crowdfunding capital
What is a loan? And advantages and disadvantages?
A sum of money is borrowed and repaid (with interest) over a determined period of time
- Interest rates are fixed for the term of the loan
- Repayments are made in equal instalments, helping budgeting
- Interest rates depend on the businesses credit rating
- Non-current liabilities are increased in the balance sheet
What is an overdraft? advantages and disadvantages?
This is a business arrangement where business current account holders to spend more money than it has in their account
A limit is agreed and interest is charged only when a business ‘goes overdrawn’
- A short-term source of finance that offers significant flexibility and aids cash flow
- An overdraft may be ‘called in’ if the bank is concerned about a business’s ability to repay what it owes
What is share capital? - advantages and disadvantages?
Share capital is finance raised from the sale of shares in a limited company
Shareholders are the owners of shares and they are entitled to a share of the company’s profit when dividends are declared
ADVANTAGES
- Large amounts of capital can be raised, especially by public limited companies
- Interest is not payable on finance raised in this way
DISADVANTAGES
- diluted ownership
-lack of control
- lose profits
What is venture capital? advantages & disadvantages?
Funds provided by specialist investors in small to medium-sized businesses that have significant potential for growth
- Businesses that may have been refused finance from other sources may be able to attract investment from less risk-averse venture capitalists
- Want a stake –> lack of control
- Return on finance
What is leasing? Advantages and disadvantages?
An asset such as a piece of machinery or a vehicle used by the business in return for regular payments
- The business does not own the asset during the period of the lease and so is not responsible for maintenance or repair costs
- Leasing is usually more expensive in the long run than buying an asset
What is trade credit? Advantages and disadvantages?
An agreement is made with suppliers to buy raw materials, components and stock which are paid for at a later date.
- Trade credit is usually interest-free
- Discounts for early payment will not be available
What is a grant? Advantages and disadvantages ?
Governments and industry trusts may offer grants to businesses that meet specific criteria
- Grants do not need to be repaid
- The business must use the finance for its intended purpose
What is the difference between unlimited and liability?
Unlimited liability is where owners are fully responsible for all debts owned by the business whereas limited liability is where owners can only lose the original amount invested
What methods of finance are suitable for limited liability businesses?
Retained profit
Debentures
Share Capital
What methods of finance are suitable for unlimited liability businesses?
Overdraft
Trade credit
Crowd funding
Personal Savings
Retained profit
What factors affect the choice of finance?
Why is it needed?
For how long is it needed?
How quickly is it needed?
Who lends it to the business?
What is a business plan ?
A business plan is a document produced by the owner at start-up, which provides forecasts of items such as sales, costs and cash flow
Why is a business plan needed for investors?
- shows businesses have done their research
- make informed decisions
- shows the risks and successes
What is the advantages and disadvantages of cash flow forecast ?
- support an application
- identify when cash is high or low
- aid planning and reduce mistakes
- based on estimates
- require skill, expertise and insight to prepare adequately
- external factors impact inflows and outflows which cannot be accounted for
What is the net cash flow (calculate) ?
Total outflows - total inflows
What is the opening balance?
Previous months closing balance carried forward
What is the closing balance?
Net cash flow + Opening balance
