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BM Business theme 2 > 2.1 Raising finance > Flashcards

2.1 Raising finance Flashcards

1
Q

What are the two sources of finance?

A

Internal and external

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2
Q

What is internal finance?

A

Money that comes from the business and its owners

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3
Q

Name 3 examples of internal finance

A

Retained profit
Owners capital (savings)
Sale of assets

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4
Q

What is retained profit?

A

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

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5
Q

What is opportunity cost

A

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

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6
Q

What are assets

A

Resources owned by a business

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7
Q

What is working capital?

A

Money used in the day to day operations of a business

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8
Q

Benefits of internal finance

A

No interest or extra charges

No input from 3rd party companies

Less paperwork

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9
Q

Disadvantages of internal finance

A

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

May not be a sufficient amount

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10
Q

What is external finance

A

Money sourced from outside the business

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11
Q

Examples of external sources of finance

A

Family and friends
Banks
Business angels
Crowdfunding

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12
Q

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

A

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

Less strings attached

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13
Q

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

A

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

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14
Q

Advantages of using banks as an external source of finance

A

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

Able to provide free advice and guidance

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15
Q

Disadvantages of using banks as an external source of finance

A

A business plan is usually required

Banks are cautious about lending to new businesses

Large amount of interest

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16
Q

What are business angels?

A

Individuals who specialise in making investments in start up businesses

17
Q

Advantages of using business angels as an external source of finance

A

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

Able to offer advice and guidance to businesses they invest in

18
Q

Disadvantages of using business angels

A

Finding a good business angel with appropriate experience can be challenging

They will receive a share of the profits

19
Q

What is crowdfunding?

A

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

20
Q

Advantages of using crowdfunding as an external source of finance

A

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

A good credit rating isn’t required

21
Q

Disadvantages of crowdfunding

A

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

22
Q

What is a joint venture

A

Contractual agreement between two or more firms to combine their resources and expertise to achieve a common goal

23
Q

What is a takeover

A

One firm acquiring control of another through purchasing a controlling stake

24
Q

What are 5 examples of methods of finance for a business

A

Loans
Gov Grants
Overdrafts
Venture capital
Share capital

25
Q

What is a loan

A

It is where a sum of money is borrowed and repaid with interest over a period of time

26
Q

What is capital equipment

A

Fixed assets such as machinery

usually a long term investment

27
Q

What are the three common types of loans

A

Bank loan
Mortgage loans - long term to purchase buildings or land
Debentures - long term agreements

28
Q

What are the benefits of loans

A

Interest rates are fixed for the term of the loan

Repayments are made in equal instalments

Businesses can purchase expensive equipment or property

Control over decision making is kept in the business

29
Q

Drawbacks of loans

A

Interest rates depend on the business credit rating

Non - current liabilities are increased on the balance sheet

Missed payments on a mortgage may lead to property being repossessed

30
Q

What is an overdraft

A

Arrangement for current account holders to spend more money than is in their account

31
Q

What are the benefits to overdrafts

A

A short term source of finance

significant flexibility

Aids cash flow

32
Q
A

BM Business theme 2 (1 decks)

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