2.1 raising finance

Question 1

What is internal finance?

Answer 1

Finance comes from inside the business

Question 2

What is external finance?

Answer 2

Finance comes from the inside

Question 3

What is owners capital?

Answer 3

Personal savings are a key source of funds when a business starts up

Question 4

What is retained profit?

Answer 4

The profit that has been generated in previous years and not distributed to owners is reinvested back into the business

Question 5

What is sales of assets?

Answer 5

Selling business assets which are no longer required (machinery, land, buildings) to generate a source of finance

Question 6

What is the benefit and drawback of using internal finance?

Answer 6

• no interest
• does not involve third parties who may want to influence business decisions
• organised quickly
• opportunity costs
• may not be sufficient

Question 7

What are the advantages and disadvantages of family/friends as a source of finance ?

Answer 7

• cheap
• no strings attached
• relationship damaged

Question 8

What is the advantages and disadvantages of bank loans ?

Answer 8

• short term finance
• free advice and guidance
• needs business plan
• interest
• cautious about lending
• security may need to be promised

Question 9

What is peer to peer funding ?

Answer 9

Individuals with available savings pool it with others in a peer investment scheme

Question 10

What is the advantages and disadvantages of peer to peer funding ?

Answer 10

• loans made quickly
• borrows are charged a small fee to access finance and pay interest in the same way as a bank loan

Question 11

What is a business angel ?

Answer 11

Some individuals in making investments in start up or expanding businesses

Question 12

What is the advantage and disadvantahge of business Angels?

Answer 12

• 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

Question 13

What is crowdfunding ?

Answer 13

Crowdfunding allows businesses to access finance provided by a large number of small investors on online platforms

Question 14

What is an advantage and disadvantages of crowd funding ?

Answer 14

• 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

Question 15

What is a loan? And advantages and disadvantages?

Answer 15

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

Question 16

What is an overdraft? advantages and disadvantages?

Answer 16

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

Question 17

What is share capital? - advantages and disadvantages?

Answer 17

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

Question 18

What is venture capital? advantages & disadvantages?

Answer 18

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

Question 19

What is leasing? Advantages and disadvantages?

Answer 19

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

Question 20

What is trade credit? Advantages and disadvantages?

Answer 20

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

Question 21

What is a grant? Advantages and disadvantages ?

Answer 21

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

Question 22

What is the difference between unlimited and liability?

Answer 22

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

Question 23

What methods of finance are suitable for limited liability businesses?

Answer 23

Retained profit
Debentures
Share Capital

Question 24

What methods of finance are suitable for unlimited liability businesses?

Answer 24

Overdraft
Trade credit
Crowd funding
Personal Savings
Retained profit

Question 25

What factors affect the choice of finance?

Answer 25

Why is it needed?
For how long is it needed?
How quickly is it needed?
Who lends it to the business?

Question 26

What is a business plan ?

Answer 26

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

Question 27

Why is a business plan needed for investors?

Answer 27

• shows businesses have done their research
• make informed decisions
• shows the risks and successes

Question 28

What is the advantages and disadvantages of cash flow forecast ?

Answer 28

• 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

Question 29

What is the net cash flow (calculate) ?

Answer 29

Total outflows - total inflows

Question 30

What is the opening balance?

Answer 30

Previous months closing balance carried forward

Question 31

What is the closing balance?

Answer 31

Net cash flow + Opening balance