2.1-raising finance

Question 1

What is finance?

Answer 1

management of investment needed to open, run and grow a business
Reasons for raising finance:
-pay off debts/suppliers
-help through a slow trading period
-to start up
-to expand

Question 2

What is internal finance?

Answer 2

finance that is raised from within the business

Question 3

What is selling assets?

Answer 3

Asset- something that the business owns
businesses sell some of their assets to gain capital
+ve
straight forward, instant sale
-ve
owner may lose benefit of asset-cant use if needed
-asset may have depreciated
-removed of balance sheet- may look unattractive to investors

Question 4

what is retained profit?

Answer 4

if the business has been trading for over a year, they may have some profit saved that they can re-invest into the business.
+ve
-quick and easy
-owner keeps all control
no need to repay interest
-ve
opportunity cost as profit cant be used elsewhere

Question 5

what is owners capital?

Answer 5

where the owner invests their own personal savings into the business
-sole traders may use when starting up
+ve
no need to repay interest
-ve
owner may not have enough so may still have to borrow

Question 6

what is external finance?

Answer 6

finance that comes from outside the business
source of finance- where the finance comes from
method of finance-how the finance is used

Question 7

family and friends

Answer 7

LTDs can sell shares to family and friends
sole traders and partnerships can borrow from family and friends
+ve
-no need for security/business plan
-may offer at lower rates than traditional lenders
-ve
may be tension if not repaid
-can demand finance back at any time

Question 8

bank

Answer 8

an offer loans to start up or expand, or overdrafts when having temporary cash flow problems
+ve
-dont lose control
-repay in installmets
-ve
repay with interest
-harder for start ups- no past data to show
-may need a business plan or assets as security

Question 9

peer to peer funding

Answer 9

a marketplace that gains the trust of consumers by offering lower interest rates compared to traditional banks
match the business with investors that are looking for a good return on their investment
+ve
-once it has been approved, can gain access to finance within a week
-apply online
-investors gain a return of 6-7% whereas a savings account gives them 3%
-ve
-capital comes from multiple investors- if not many investors are interested full amount may not be able to get raised

Question 10

business angels

Answer 10

someone who offers their own disposable income in return for shares in the business
investors share their business knowledge
want return between 3-8 years
+ve
-no need to repay interest on money lent
gain business knowledge and contacts
-ve
only good for businesses raising 10,000-500,000
owner may have to give up control

Question 11

crowdfunding

Answer 11

a large number of people fund a project
3 ways:
donate
lend
invest
+ve
-good alternative to loans for small businesses
-promotes business at same time
-ve
need to showcase your idea to investors
need to create promotional material to attract investors

Question 12

venture capitalist

Answer 12

invest in businesses which are seen as high risk with the potential to be successful
more likely to invest in establishes firms- who want over 500,000
+ve
professional
give expert advice to help business grow
want repayments within 3-5 years
-ve
30% return on investment each year
may want some control in business

Question 13

factors affecting finance

Answer 13

-size of the business
-type of business
-how much finance is needed
-if theres any internal available
-short term/long term
-how long it takes to get finance
-state of the economy

Question 14

what is a liability

Answer 14

a debt that the business owes

Question 15

what is limited liability

Answer 15

where the business and owner are seen as separate legal identities- owner is not personally responsible for debts of the business
-LTDs an PLCs have limited liability- easier to raise finance as they can sell shares

Question 16

what is unlimited liability?

Answer 16

where the owner and business are seen as one- owner is personally responsible for any debts the business owes
-sole traders and partnerships have unlimited liability
suitable methods of finance:
-owners capital
-family and friends
-selling assets
retained profit
-crowdfunding

Question 17

what is a method of finance ?

Answer 17

how the finance is used

Question 18

overdraft

Answer 18

the bank allows the business to go over the amount in their account
short term- when business needs extra finance
+ve
quick and easy
only pay interest on borrowed amount
repay when cash flow improves
-ve
if you go over overdraft limit, will be charged heavily
high interest rates
not suitable for big amounts or long term

Question 19

leasing

Answer 19

if the business doesnt have enough cash to buy an asset, they may lease it instead
this is where they pay a monthly sum over a set period f time in return for using an asset
once leasing period is over, asset gets returned to leasing firm
+ve
lower monthly cost and no large upfront sum
leasing firm maintains and updates equipment
-ve
may be costly in long term rather than buying asset outright

Question 20

trade credit

Answer 20

when a business purchases a product/service they dont have to pay straight away 0 but within a set time
allows the buyer to sell their products before paying suppliers
+ve
improves cash flow- business can make a profit before costs go out
pay ontime, gain a good relationship with suppliers so may receive discounts
no interest repaid
-ve
if not paid on time, can refuse credit in future
not all products available to buy on credit
if not repaid, will gain a bad credit score

Question 21

grant

Answer 21

a fixed sum of money given to the business by the government
-to try and overcome unemployment
-need to apply for it
+ve
dpnt repay
no interest
dont lose control
-ve
competitive
strict criteria on how moneys spent
time consuming

Question 22

What is a business plan

Answer 22

a document created by the business to plan for the future
-it outlines what the business wants to achieve and how

Question 23

why is it used

Answer 23

-help understand the business and the market
-helps plan for the future
-helps gain external finance as research is done which attracts investors - lowers the risk
-also shows how profitable the business is

Question 24

What is a cash flow forecast

Answer 24

shows cash that flows in and out of the business
inflows- revenue, shares
outflows- wages, raw materials

amount of cash that a business has on a day to day is known as working capital
Its important for a business to have a good cash flow as they need cash to pay suppliers, and some customers may buy products on credit, meaning they wont receive the payment straight away

Question 25

benefits

Answer 25

it allows them to make decisions and plan for the future
make sure they have enough cash to pay costs
on a business plan- helps raise finance

Question 26

drawbacks

Answer 26

uses past data so may be inaccurate
-new businesses may not have any past data
-needs alot of research
doesnt take into account any changes

Answer 27

net cash flow= inflows + outflows
closing balance= opening balance + net cash flow
opening balance= closing balance of previous month