2.1 Raising Finance Flashcards
What is internal finance?
Finance from the owner’s capital, retained profit, or the sale of assets.
What is owner’s capital/personal savings?
Personal savings are a key source of funds when a business starts up. Owners may invest more as the business grows.
What is retained profit?
The profit that has been generated in previous years and not distributed to owners is reinvested back into the business.
What is sale of assets?
Selling business assets which are no longer required generates a source of finance. A sale and leaseback arrangement may be made if a business wants to continue to use the asset but needs cash.
What are the benefits of internal sources of finance?
1)internal finance is often free
2)organised and able to use very quickly(no paperwork)
3)businesses that may fail credit checks can access internal sources of finance easier.
What are the drawbacks of internal sources of finance?
1)there is a significant opportunity cost.
2)may not be sufficient to meet the needs of the business.
What is external finance?
Finance that is sourced from outside of the business?
What are the 6 external sources of finance?
1)family and friends
2)Banks(loan, overdraft)
3)peer to peer lending
4)business angels
5)crowdfunding
6)other businesses
How is finance acquired from family and friends?
Small business owners approach close acquaintances to invest in or lend money to a business.
What are the advantages of using family and friends as an external source of finance?
1)usually a very cheap source of funds
2)can be provided to a business on very flexible terms
What are the disadvantages of using family and friends as an external source of finance?
Relationships may be damaged if the finance is not repaid?
How do banks provide finance for firms?
By providing several kinds of bank loans to businesses.
What are the advantages of using bank loans as a source of finance?
1)offer both short term finance as well as long term
2)able to use unsecured loans if your credit rating is poor
3)banks are often keen to give advice and guidance to a business that use their services
What are the disadvantages of using bank loans as a source of finance?
1)a business plan is usually required to access bank finance
2)banks can be cautious about lending to new businesses
3)interest has to be payed
4)need a good credit rating to access large amounts of money.
What is peer to peer funding?
Individuals with savings pools it with others in a peer investment scheme such as funding circle.
What are the advantages of using peer to peer funding as a source of finance?
1)loans can usually be made available to businesses very quickly
2)usually has no share of the business attached
What are the disadvantages of peer to peer funding?
1)have to pay interest to access the finance.
What are business angels?
Individuals that specialise in making investments in start ups or expanding businesses.
What are the advantages of business angels?
1)advice and guidance to the business.
2)willing to take risks more than banks.
What are the disadvantages of business angels?
1)finding the right business angel can be challenging.
2)as business angels own a stake in the business, they may be involved in decision making and will receive a share of the profits
What is crowdfunding?
Crowdfunding is finance provided by a large number of small investors on online platforms.
What are the advantages of crowdfunding?
1)provides a form of free marketing
2)a good credit rating is not required
What are the disadvantages of crowdfunding?
1)businesses need to provide a persuasive business plan.
2)the potential for negative publicity if the project is not successful in attracting enough crowdfunding capital
What are the seven methods of finance?
1)loans
2)share capital
3)venture capital
4)overdrafts
5)leasing
6)trade credit
7)grants
