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
Name 7 external methods of finance
Methods of finance:
1. Loans
2. Share capital
3. Venture capital
4. Overdrafts
5. Leasing
6. Trade credit
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.
* No prior relationship or knowledge between lender and borrower is needed (thus may be easier to obtain than a bank loan)
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 garantee that your funding goal will be reached - some websites only pay out from doners if the full funding goal is reached!
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
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. 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. Incorporated businesses like sole traders or partnership. May find it easier to raise finance as lenders are more likley to be reinbursed if the owner defualts.
