2.1 Raising finance Flashcards
what is owners capital
personal savings from the owner or another sum of money like a redundancy payment
what is retained profit
profit that has been generated in previous years that is not given to owners in dividends
what is sale of assets
selling the businesses assets that are no longer needed or are in little use
advantages of internal finance
often free
doesnt involve a 3rd party
does not need a good rep (loans)
disadvantages of internal finance
opportunity cost - retained profit can go to shareholders, assets can be used for something else
may not be of enough value
what are the different sources of external finance (6)
family and friends
banks
peer2peer funding
business angels
crowdfunding
other businesses
family and friends
approaching people in close relation with the desire of getting a sum of money from them for the business
cheap and flexible
relationships may be damaged
banks
provide different kinds of loans to businesses and overdrafts
can offer long term finance and short term finance (loans, overdraft)
provide free advice
business plans needed, small or new businesses may not be accepted
interest
may need to provide security/ collateral
p2p funding
Individuals with available savings pool it with others in a peer investment scheme
loans with no strings attached - gamble
borrower has to pay interest
business angels
individuals that make investments into small/ new businesses
take more risk than banks - more opportunity
offer advice
investment is temporary
hard to find right angel
may want to take over business
crowdfunding
finance provided by a number of small investors over the internet on websites i.e kickstarter
free marketing
no interest or credit rating needed (but it can help!)
business plan needed
negative publicity if it tanks
other businesses
a joint venture w/ another firm, such as a key customer or supplier
may provide knowledge
large amounts of finance
profits need to be shared
all decisions need to be agreed across businesses
methods of finance (7)
loans
leasing
share capital
trade credit
venture capital
grants
overdrafts
loans
a sum of money that is typically borrowed from a bank and paid back w/ interest
IR are fixed
can purchase anything with loans
no loss of control
need credit rating and business plan
repos of property
failure to repay may deter investors
overdraft
An arrangement for business current account holders to spend more money than it has in their account
instant process - aiding cash flow
may be called in if bank doubts business can pay it back
share capital
finance raised from the sale of shares in a limited company
Large amounts can be raised (plc)
no IR
shareholders have power and can decide the board of directors
venture capital
funds provided by specialist investors that have growth potential
no need for credit score - some do not care
usually want a stake - potentially taking too much control
Leasing
An asset such as a piece of machinery or a vehicle used by the business in return for regular payments
business does not own it so they do not have to pay for repair or maintenance
more expensive than buying the asset in the long run
trade credit
agreement with suppliers to buy raw materials, components and stock which are paid for at a later date, typically 30 to 90 days later
interest free
no discounts
grants
Governments and industry trusts may offer grants to businesses that meet specific criteria
do not need to be repaid
need to be used for exact purpose
limited liability
owners of limited companies only lose the sum of money they invested if the business fails
unlimited liability
unincorporated businesses - owners are fully responsible if a business fails or loses money meaning they have to pay back all debts even if they have to use their own savings
what types of finance have limited liability
business angels
venture capital
retained profit
share capital
what types of finance have unlimited liability
anything that comes from a corporation
(loans, overdraft, personal savings, leasing)
