2.1 Raising Finance

Question 1

Sources of internal Finance

Answer 1

Owners capital
Retained profit
Sale of assets

Question 2

Benefits of internal finance

Answer 2

No interest
No loss of control
Firms who are unable to get loans due to credit checks can still gain finance

Question 3

Drawbacks of internal finance

Answer 3

Opportunity cost of using retained profit
Limited amount can be raised
Hard for smaller firms as they may not have as much retained profit or assets

Question 4

Sources of external finance 5

Answer 4

Family and friends
crowdfunding
bank loans
venture capital
business angels

Question 5

Pros and cons of family and friends

Answer 5

P-cheap source of finance
-flexibility

C-relationship may be damaged if they don’t repay

Question 6

Pros and Cons of Bank Loans

Answer 6

P- large amounts of finance can be raised

C-interest
-banks cautious about lending to smaller firms
-business plan may be needed

Question 7

Business Angels pros and cons

Answer 7

Pros- more willing to take risks than banks
-offer advice and guidance

Cons-hard to find right business angel
-loss of control

Question 8

Crowdfunding definition

Answer 8

Finance provided by a large number of small investors

Question 9

Crowdfunding pros cons

Answer 9

P- builds awareness for the brand
-don’t need a good credit score to gain finance

C- may be hard to build up a lot of investors without spending on advertising
-negative publicity if the project goes bad

Question 10

Methods of finance

Answer 10

Loans
Overdraft
Trade credit
Venture capital
Grants

Question 11

Loan definition pros and cons

Answer 11

A sum of money given to firms/consumers that has to be paid back in a time period

P-Large amounts can be raised
-Repayments are made in equal instalments so budgeting is easier

C-Interest

Question 12

Overdraft definition pros and cons

Answer 12

Allows a firm to spend more money than they actually have

P- short term method
-flexible
C- may be turned in if bank doesn’t think firm can repay

Question 13

Share Capital defintion, pros cons

Answer 13

Raising finance with the sale of shares

P- large amounts can be raised
-No interest

C-loss of control

Question 14

Venture capital definition, pros cons

Answer 14

Funds provided by specialist investors to firms with potential

P-gain infomation and expertise
-loss of control

Question 15

Trade credit definition, pros and cons

Answer 15

Deal with suppliers to pay for supplies at an organised later date

P-interest free
C-no discounts

Question 16

Unlimited Liability

Answer 16

Owner(s) are the same entity as the firm and have full responsibility for debts
Personal assets are at risk

Question 17

Limited liability

Answer 17

Owner and firm are separate entities and owner what’s invested is at risk

Question 18

Cash Flow forecast definition, pros cons

Answer 18

a prediction of cash inflows and cash outflows usually over a 6 or 12 month period

P-Help planning -> can avoid costly mistakes
- can support application for a loan

C-Based off estimates
-require skill, time and effort to make and update regularly