2.1 Raising Finance Flashcards
What are the sources of finance?
-internal finance
-external finance
What is internal finance and what are some sources of internal finance
Internal finance is cash that comes from within the business. Some sources include: owner’s capital, retained profit or the sale of assets
What is owner’s capital
the personal saving of the owner e.g. cash received from redundancy
-owners use owner’s capital for short term cash flow issues
What is retained profit?
Profit that has been reinvested into the business, from previous years.
-this is a cheap source of finance as it involves no borrowing
the opportunity cost of investing money back into the business is shareholders receive less dividends
What is the sale of assets
Selling of business assets that are no longer needed e.g. machinery
- a lease of an asset may be made to generate cash, but keep ownership of the asset.
What are the advantages and disadvantages of internal finance?
ADV
+free from borrowing (interest rates)
+does not involve third parties, who want to influence decision making
DIS
-significant opportunity cost
-may not be sufficient amount to meet needs of business
-less tax-efficient compared to external methods
What is external finance and what are some sources of it?
External finance is sourced from outside the business. Some sources are : family & friends, peer-peer lending, crowdfunding, venture capitalists, banks and other businesses
Advantage and disadvantage of family and friends for a source of external finance
ADV
-cheap source of finacne
DIS
-relationships can be damaged if not repaid
Advantages and disadvantages of banks for a source of external finance
ADV
-can provide short and long term finance
-banks can provide advice and guidance
DIS
-a business plan is required
-businesses must be previous customers
-interest rates
Advantages and disadvantages of peer-peer funding as a source of external finance
ADV
+loans can be made available very quickly
+often ‘no strings attached’
DIS
-borrowers can be charged interest on loans
Advantages and disadvantages of business angels (venture capitalists) as a source of external finance
ADV
+more willing to take risks than banks
+offer advice and guidance
DIS
-business angels are involved in decision making
-finding appropriate business angels with the right expertise can be challenging
Advantages and disadvantages of crowdfunding as a source of external finance
crowdfunding is finance provided by a large number of small investors e.g. kickstarter
ADV
+a good credit score is not required
DIS
-businesses need a persuasive business plan
What are some different methods of finance
-loans
-overdrafts
-share capital
-trade credit
-venture capital
-grants
What is a loan and what are the benefits and drawbacks
A loan is a sum of money which is borrowed and repaid (with interest)
ADV
+interest rates are fixed
DIS
-interest rates are dependent on credit score
What is an overdraft and what are the benefits and drawbacks
An overdraft is an agreement with a bank where businesses can make payments from bank accounts exceeding available cash.
ADV
+good short term use of finance
DIS
-possibly high interest rates
What is share capital and what are the benefits and drawbacks
Share capital is finance raised from the sale of shares.
ADV
+large amounts of capital can be produced
+no interest
DIS
-can give away control in the business
What is trade credit and what are the benefits and drawbacks
Trade credit is an arrangement to buy goods/services, without immediate cash payments.
ADV
-interest free
DIS
-discounts not available
What is a grant and what are the benefits and drawbacks
A grant is a payment provided by a government or industry for a specific purpose
adv
-do not need to be repaid
dis
-the business must use the finance for its intended purpose
Define ‘limited liability’ and what are the implications?
Limited liability means the business owners assets are not at risk due to multiple separate owners
Implications - if the company fails, they would lose their investment in shares
Define ‘unlimited liability’ and what are the implications?
Unlimited liability means that the owners personal assets are at risk
Implications - business owners will have to use personal savings to repay debts
Sources of finance for limited liability
-share capital
-retained profit
-venture capitalists
sources of finance for unlimited liability
-personal savings
-bank loans
-crowd funding
define ‘business plan’
a document produced by the owner, providing forecast for the business e.g. sales
Why are business plans useful?
-reduces risk of failure (allows owner to look at every aspect of the business)
-shows investors the business has done their research
