2.1 raising finance

Question 1

what is a business plan?

Answer 1

• a plan for the developments of a business giving details such as the products to be made, resources needed and forecasts such as costs, revenue, cash flow

Question 2

what does a business plan contain?

Answer 2

• an executive summary
• buying and production
• financial forecasts
• market
• personal
• finance

Question 3

what are the 2 types of expenditure?

Answer 3

• capital expenditure

- revenue expenditure

Question 4

what is capital expenditure?

Answer 4

• spending on business resources that can be used repeatedly over a period of time

Question 5

what is revenue expenditure?

Answer 5

• spending on business resources that have already been consumed or will be very shortly

Question 6

what are types of internal finance?

Answer 6

• owners capital
• retained profit
• sale of assets

Question 7

what is owners capital?

Answer 7

• personal savings

Question 8

what can owners capital be used for?

Answer 8

• start up, expansion, replacement capital

Question 9

what are advantages of using owners capital?

Answer 9

• no need to repay the money
• no interest
• no cost

Question 10

what are disadvantages of using owners capital?

Answer 10

• might not have much funds, will need to find another way

Question 11

what are advantages of using sale of assets to raise finance?`

Answer 11

• good if the asset is no longer of use

Question 12

what is a disadvantage of using sale of assets to raise finance?

Answer 12

• can take time to sell
• may affect production
• may not find a buyer

Question 13

what are examples of external finance?

Answer 13

• family and friends
• banks
• peer to peer funding
• business angles
• crowd funding
• loans
• share capital
• venture capital
• overdraft
• leasing
• trade credit
• grants

Question 14

what are advantages of using family and friends to raise finance?

Answer 14

• may be more flexible lenders

- longer repayment time

Question 15

what is a disadvantage of using family and friends to raise finance?

Answer 15

• may damage relationship if there’s any misunderstandings

Question 16

what are business angles?

Answer 16

• individuals who invest smaller amounts of money into a business in return for a stake

Question 17

what are advantages of using business angles to raise finance?

Answer 17

• they bring their knowledge to the business
• they are wealthy
• no repayment or interest

Question 18

what are disadvantages of using business angles to raise finance?

Answer 18

• can take long to find a suitable investor
• have to give up a share of the business
• not suitable for investments over £500,000 or below £10,000

Question 19

what is share capital?

Answer 19

• shares are sold on the stock market
• raising money
• buyers become shareholders and part owners

Question 20

what are advantages of using share capital to raise finance?

Answer 20

• lots of finance can be raised
• money doesn’t have to be payed back
• no interest is payable

Question 21

what are disadvantages of using share capital to raise finance?

Answer 21

• shareholders are entitled to have a say in running the business
• the business may be taken over and existing shareholders no longer own the business

Question 22

what is venture capital?

Answer 22

• an external investor looking for fast growth and return on their investments

Question 23

what are advantages of using venture capitalists to raise finance?

Answer 23

• business expenditure
• additional resources
• connections

Question 24

what are disadvantages of using venture capitalists to raise finance?

Answer 24

• loss of control

- loss of management could happen

Question 25

what is an overdraft?

Answer 25

• allows a business to spend more than it has in its accounts

Question 26

what are advantages of using an overdraft?

Answer 26

• its flexible
• quick to arrange
• interest is only payed to amount borrowed

Question 27

what are disadvantages of using an overdraft?

Answer 27

• cannot be used for large borrowing
• rates of interest higher than loans
• bank can change limit at any time or ask for money sooner than expected

Question 28

what is leasing?

Answer 28

• ‘renting’ vehicles or machinery over a period of time

Question 29

what are advantages of using leasing?

Answer 29

• can spread the cost
• access to higher standard equipment
• cash flow management is easier

Question 30

what are disadvantages of using leasing?

Answer 30

• can work out to be more expensive
• you don’t own the equipment
• can get locked into inflexible, medium or long term agreements

Question 31

what is trade credit?

Answer 31

• ‘buy now, pay later agreement’

Question 32

what is a grant?

Answer 32

• a sum of money provided by the government

Question 33

what is an advantage of using a grant?

Answer 33

• doesn’t have to be payed back

Question 34

what is an opportunity cost?

Answer 34

• the cost of the next best alternative foregone

Question 35

what is retained profit?

Answer 35

• profit after tax reinvested back into the business

Question 36

what are advantages of using retained profit?

Answer 36

• the capital is available immediately
• internal finance is cheap
• no interest
• no need to involve third parties

Question 37

what are disadvantages of using retained profit?

Answer 37

• can be limited, may not be sufficiently profitable

- opportunity cost of internal finance can be high

Question 38

what is inflation?

Answer 38

• average general increases in price

Question 39

what is sale and lease back?

Answer 39

• when a business sells an asset and then rents it back to gain finance