2.1 Raising Finance Flashcards
Internal Finance
Benefits- retention of control, cost savings, flexibility, maintaining financial stabillity, keeping 100%- profit isnt diluted
Drawbacks- Limited funds, Increased risk, reduced stakeholder confidence
Owners Capital: Personal Savings
Internal
Owner invests own savings
Benefits: no interest payments, appeal to investors, retain ownership/control
Drawbacks: limited pesonal resources, owners may forfeit personal assets, missing out on investment options with higher return
Retained Profit
Internal
profit re-invested bacl into/kept by business which isnt kept as a dividend, can be used to pay debt
Benefits: reduces financial burden, preserves owners equity, investments based on priority/goals
Drawbacks: may miss out on other profitable investments, may not be big enough to fund big development/expansion ambitions, reduce liquidity
Sale of Assets
Internal
selling resources that belong to business, asset= anything that can generate income + lasts >1yr
Benefits: raise money quickly, streamline operations+minimise costs, boosts return on assets= more attractive to investors
Drawbacks: can affect growth, can affect ability to make money in future, size+scope of business may limit how much can be raised, can be percieved as financially unstable
External Finance
Reasons for:
Lack of internal funds
Diversifying funding source
Attracting investors
Opportunity for growth
Source of finance
Family and Friends
External
Personal Loans- person who owns business can borrow £ from friends/fam
Equity Investments-invest in business by buying shares
Gift/Donations
Benefits: quick +easy approach, repayment flexibility, more willing to invest
Draw
backs: can strain relationships, lower business professionalism, impede growth
Source of Finance
Banks
External
Loans for businesses- borrowed from bank, paid back with interest
Lines of Credit- flexible way for business to get £, to go certain limit
Credit Cards- to buy things+keep track of costs
Benefits: gives lots of capital, interest rates typically lower, faster loans if relationship with the bank
Drawbacks:strict requirements for loans e.g. good credit score, long process, need to put up a collateral
Source of Finance
Peer-to-Peer Funding
External
a person lends money to other individuals or businesses via online transactions, allows business to borrow money directly from private investors instead of banks, for businesses that need quick action
Benefits: quick to raise moeny, cheaper (lower interest, fewer fees), more flexible
Drawbacks: risky for lender, may lead to higher interest, may not recieve amount needed
Source of Finance
Business angels
External
Equity financing- when investing in business they expect share of ownership, they can give £ to allow growth
Expertise+Advice- mentoring
Benefits: brings early stage businesses knowledge, offers flexible fnancing terms which changes to meet needs, connections
Drawbacks: give up chunk of business, risk of conflict, less investment
Source of Finance
Crowd Funding
External
large no. of individuals provide funding fr a business/ project in return for shares/free products/discounts
Reward Based
Equity CF- use of online platform
Benefits: access to large pool of investors, spreads word, helps build community
Drawbacks: not as much £ to grow/expand, compelling marketing needed
Source of Finance
Other Businesses
External
some businesses get £ by forming partnerships with other companies e.g. joint ventures, strategie partnerships
provides access to money, skills, new markets
Benefits: flexible, business looks trustworthy, trade credit+selling invoice can improve cash flow
Drawbacks: risky as could become dependent, more expensive, may lose control
Methods of Finance
Loans
External
amount of £ borrowed from bank, usually repayable after fixed term of >12mths, can be secured or unsecured, can come from banks, other lenders, government programmes
Benefits: access to capital, flexible repayment/interest/collateral, keep ownership, interets paid on loans deducted from taxes
Drawbacks: have to pay back, pay interest, strict qualification criteria, often request property or equipment as collateral to secure loan
Methods of Finance
Share Capital
External
a way to raise finance by issuing new shares, shareholdes recieve piece of the company’s ownership and cut of future profits
Private limited Company- sc can be raised by selling shares to small group of ppl/institutions
Public Limited Company- can be raised through initial public offering, sells shares to public in exhange for £
Benefits: no debt obligations, no interest payments, no collateral, investors could become loyal customers
Drawbacks: gives up ownership, return on investments e.g. dividends=pressure,
Methods of Finance
Venture Capital
External
when the business issues shares to small no.of investors in return for capital injection into the company
Investors who give £ to high potential start ups
Benefits: valuable industry knowledge & connections, give businesses alot of £, doesn’t create debt that needs to be paid back
Drawbacks: large share of business in exchange for investment, wants a high return on investment, many costs involved, owner takes lots of time and work
Methods of Finance
Overdrafts
External
-ve balance in the business’s bank account as the amount withdrawn is greater than current balance, business can get an overdraft which is short term loan that lets them take out more money than they have
Benefits: easy to set up, freedom to deal with changes in cash flow&unplanned costs, avoid late fees+penalties, lower interest rates than others
Drawbacks: high fees, pay extra fees and interest, short term
Methods of Finance
Leasing
External
contract to acquire the use of resources such as properly or equipment, instead of big up front investment
Benefits: cost less upfront, payments usually fixed for length of lease, may be tax-deductible, gives business access to new & updated equipment, don’t have to get rid of assets
Drawbacks: pay for long time, cant use as a collateral for other types of financing, might be subject to certain t&cs, can limit how asset is used, business doesnt have full control
Methods of Finance
Trade Credit
External
firm recieves stock/inventory/raw materials from a supplier, which it doesnt have to pay for until later, manages cash flow-incomes can fluctuate
Benefits: most dont have fees or interest charges, manage cash flow, if paying on time you develop good relationship- cheaper/discounts in future, easy to get
Drawbacks: if not paid on time can affect relationships with suppliers, limited offer of £, if paying late may hurt credit rating, may nit be available to all businesses
Methods of Finance
Grants
External
sum of moneygiven by a government or other organisations, it doesnt need to be repaid, no interest is charged
Benefits: no worry about repaying, £ for R&D, helps business’s rep+credibility as its recognised, connections with others, access to mentoring+resourves=growth
Drawbacks:competitive, application is long-term, may not be available to all businesses, may not have full freedom in how they use the money
Limited Liability
Obligation of a shareholder for the debts of a business is limited to the value of their investment
They are repsonsible for the amount they put into the business, nothing more
Benefits & Drawbacks of Limited Liability
Benefits: Keeps owner’s assets from being taken to pay off business debts, easier to get £ from investors , business structure easier to understand , business can keep running even if one or more owner leaves
Drawbacks: takes more risk, lenders may be less willing to give credits or may ask for higher interest rates, must follow the laws and fill annual reports, takes lots of time + £
Unlimited Liability
Obligation of owner to cover all debts of business
Owners/Partners are fully responsible for all debts + legal claims
Benefits & Drawbacks of Unlimited Liability
Benefits: accountable for all businesses debts & responsiblities, easier to get credit for because owner;s personal assets at risk, can help secure capital or supllier credit, simplifies business structure, more freedom
Drawbacks: exposes owners to financial danger, owners may be reluctant to take on alot of debt or make large investment, stressfull
Relevance of a Business plan in obtaining finance
Business plan is a document giving details of a variety of aspects about the business in order to provide a strategic look at business and to attract investors
Cash Flow Forecast
-financial statement that estimates the amount of cash thats expected to flow in (cash inflow) and out (outflows)over specific period of time
Function: allows business to identify times when there may be shortage and plan by saving, pay stakeholders + staff, clearlayout of finance
