2.1 - Raising finance Flashcards
Define Capital Expenditure
Funds allocated by a company for the purchase of long-term assets (e.g. premises)
Define revenue expenditure
Spending on business recourses that have already been consumed or will be shortly (i.e. Short term assets like raw materials)
Name 3 sources of internal finance
- Owners capital - personal savings
- Sale of assets
- Retained profit
Name 6 external sources of finance
Sources of finance:
1. Family and friends
2. Banks
3. Peer-to-peer funding
4. Business angels
5. Crowd funding
6. Other businesses
STOLL VG
Name 7 external methods of finance
Methods of finance: (STOLL VG)
2. Share capital
3. Trade credit
4. Overdrafts
5. Leasing
7. Loans
8. Venture capital
7. Grants
Describe and briefly evaluate peer to peer lending and crowd funding
P2PL: An external source of finance in which unrelated individual (called ‘peers’) lend money without going through a bank. This often relies on individuals who fundraise on behalf of the organisation through personalized giving pages.
* Transactions occur online on websites like Zopa or Rate setter, which typically charge a 1% fee.
* Loan must be repayed
* May be charged fee for early withdrawal of money
* Interest also charged on loan by lender, but typically less then on a bank loan.
* Usually unsecured loans so borrowers assets NOT at risk
* No protection for borrower if lender defaults (stops paying) as Financial Services Compensation Scheme, which covers lenders loans of up to £85,000 does not apply. So business recieving loan might not get paid = higher risk.
* No prior relationship or knowledge between lender and borrower is needed (thus may be easier to obtain than a bank loan)
Describe and briefly evaluate business angels
An external source of finance in which a wealthy individual invests personal capital into a business in return for an equity stake.
* As owners recieve a stake in the business, it is important the angel investor and entrepreneur has common aims. Profits are also shared.
* Business angels can provide expertise in running a business and financial knowledge.
Describe and briefly evaluate bank loans
An external source of finance in which a fixed sum of money is borrowed to be repayed over a clearly defined period in regular installments.
* A bank may demand a secured loan, in which a business must offer a collateral, should it default. Businesses likley prefer an unsecured loan so thier assets are not at risk.
* Types of loan capital include bank loans, mortgages (Long term secured loans) and debentures
* Secured loan (e.g. mortgages) typically have lower interest rates than unsecured loans as there’s less risk to lender.
* Debentures are a specialised method of loan finance issued by a creditor, but not an owner, of a business. Debentures are repayed in regular installment by a set date (when the debenture matures). In the UK, but not in the US, debentures are secured.
* Lenders have no equity in business - so no voting rights
Define a collateral
An asset pledged as security for repayment of a loan, to be forfeited in the event of a default.
Define insolvency
A financial state in which a business is unable to meet its financial obligation (i.e. pay debts due)
Define debentures
A type of bond secured against an asset and offering a fixed rate of interest. In the UK, but not in the US, debentures are secured. Often used by PLCs
Define creditors and debtors
Debtors - an entity that owes money to the business (assets)
Creditors - an entity that is owed money from the business (liability)
Describe share capital
Issued share capital - money raised from the sale of shares
Share capital is often refered to a permenant capital as its not repayed
* Ordinary shares(equities) - most common type, no garunteed dividend, owners have voting rights
* Preference shares - payed dividends before ordinary shareholders
* Deffered shares - often held by owners - only recieve a dividend after ordinary share holders have recieved a minimum amount.
Describe leasing
A lease is a contract to aquire the use of recources such as property or equipment in return for regular payments
Note that leasing as a source of finance refers to named business leasing an asset from another business (i.e. it pays out)
Loans can’t be secured on assets that are leased.
The company may be given an option to buy the asset after the lease period is over (i.e. 3 years)
Describe unlimited liability
Unlimited liability - the owners of the business and the business are the same legal entity. Unincorporated businesses like sole traders or partnership.
Factors to consider when selecting the most appropriate source of finace
- Short of long term
- Unlimited or limited liability
- Cost of the source (i.e. interest repyments, permenant capital?)
What does it mean if a business is undercapitalised?
Didn’t raise enough finance when setting up
Describe the contents of a business plan
Executive summary - an overview of the business start up. Includes info like the oppotunity to be exploited, marketing and sales stratergy, operations and finance.
Business oppotunity - a description the future product portfolio, including quantity made and selling price
Buying and production - suppliers, cost of production
Financial forecasts
The business and its objectives - the name and adress of business, its legal structure, and its aims and objectives
The market - size, description of target audience, nature of competition and marketing priorities
Personel - number of employees, their skills and qualitifactions
Premisis and equipment
Sources of Finance
Distinguish between aims and objectives
- Business Aim: The overall long-term target or goal of the business.
- Business Objectives: The short-term steps a business needs to take to meet its overall aims. Objectives can be broken down further into functional, team, and individual objectives.
Describe the uses of cashflow forecasting
- Liquidity management - plan spending in accordance with cash shortages and surpluses. Aviod unecesssary borrowing
- Identify variances in forecast at the end of the financial year to identify areas for improvement.
- Obtain finance - show lender predicted solvency of business.
Give 3 limitations of a cashflow forecast
- Prediction is based on potentially unreliable data - external economic influences could result in significant variances in actual figures.
- Time consuming to gather data to produce a forecast and regually update it - could come at the expense of meeting customer needs
- Ignores other important indicators of business performance (e.g. profit, productivity) - dosen’t provide a holistic view
Breify evaluate retained profit
Advantages
* Instant access - first mover advantage
* No interest
Disadvantages
* May be limited amount
* Shareholders may be dissatisfied if payed less dividends
What is meant by shareholder funds?
Shareholders equity / shareholders funds is the net worth and it is equal to the total monatery amount that would be returned to the shareholders if the company must be liquidated and all its debts are paid off. Thus, shareholder equity is equal to a company’s total assets minus its total liabilities.
Give ways of improving working capital
- Convert stock into cash by selling at a lower price
- Chase payment from debtors (owe money to business)
- Use/ extend credit period with suppliers (delaying payment)
- Use short term borrowing (e.g. overdraft)
Explain why a business won’t want too much working capital
- This may represent a significant opportunity cost especially when interest rates are high
- If a business is holding large amounts of inventory it may incur extra storage costs (e.g. security and handling costs) and could use the cash ‘tied up’ in this stock for other purposes
Describe and evaluate crowdfunding
Crowd funding: An external source of finance for a project or venture in which a large number of people each contribute a relatively small amount, typically online via websites like Crowdfunder or KickStarter. The business often has a social aim or USP which acts as an incentive for investors.
* Investors often recieve a share in the business, or some other reward
* May not have to repay funds
* Can acts as a form of promotion - raising awareness amoung target audience
* Some websites charge fees which take a percentage of money raised
* No guarantee that your funding goal will be reached - some websites only pay out from doners if the full funding goal is reached!
