2.1 Raising finance

Question 1

What are the two sources of finance?

Answer 1

Internal and external

Question 2

What is internal finance?

Answer 2

Money that comes from the business and its owners

Question 3

Name 3 examples of internal finance

Answer 3

Retained profit
Owners capital (savings)
Sale of assets

Question 4

What is retained profit?

Answer 4

Profit that has been generated in previous years and reinvested into the business

Question 5

What is opportunity cost

Answer 5

Value of the benefit lost from the next best alternative when a business has to make a choice

Question 6

What are assets

Answer 6

Resources owned by a business

Question 7

What is working capital?

Answer 7

Money used in the day to day operations of a business

Question 8

Benefits of internal finance

Answer 8

No interest or extra charges

No input from 3rd party companies

Less paperwork

Question 9

Disadvantages of internal finance

Answer 9

Significant opportunity costs. e.g. once retained profits are used it is not available for other uses

May not be a sufficient amount

Question 10

What is external finance

Answer 10

Money sourced from outside the business

Question 11

Examples of external sources of finance

Answer 11

Family and friends
Banks
Business angels
Crowdfunding

Question 12

Advantages of using friends and family as an external source of finance

Answer 12

A very cheap source of funds (Low interest, low extra charges)

Less strings attached

Question 13

Disadvantages of using friends and family as an external source of finance

Answer 13

Relationships could be damaged if you are unable to repay the finance

Question 14

Advantages of using banks as an external source of finance

Answer 14

Offer short term finance (overdrafts) and long term finance (loans)

Able to provide free advice and guidance

Question 15

Disadvantages of using banks as an external source of finance

Answer 15

A business plan is usually required

Banks are cautious about lending to new businesses

Large amount of interest

Question 16

What are business angels?

Answer 16

Individuals who specialise in making investments in start up businesses

Question 17

Advantages of using business angels as an external source of finance

Answer 17

Business angels tend to be more willing to take a risk than banks

Able to offer advice and guidance to businesses they invest in

Question 18

Disadvantages of using business angels

Answer 18

Finding a good business angel with appropriate experience can be challenging

They will receive a share of the profits

Question 19

What is crowdfunding?

Answer 19

Raising small amounts of money from a large number of individuals to finance a business idea.

Question 20

Advantages of using crowdfunding as an external source of finance

Answer 20

Organic customer base and the platform provides a form of free marketing.

A good credit rating isn’t required

Question 21

Disadvantages of crowdfunding

Answer 21

Must have a persuasive business plan to convince individuals to invest into their product

Large amounts if competition, not guaranteed finance

Must meet your goals to receive the finance