2.1 Raising Finance Flashcards
what is Capital expenditure?
expenditure on resources that can be used repeatedly over a long period of time e.g. factory, machinery, vehicles
What is Revenue expenditure?
spending on business resources that have already been consumed or will be very shortly e.g. raw materials, energy, rent, utilities
Bank Loan:
- Short/Long?
- Internal/External?
- Capital/Revenue?
- Long (but can be Short)
- External
- Capital
What are the advantages to a bank loan?
- You won’t have to give the bank a percentage of your profit or a share in your company.
- Banks do not take any ownership of the businesses
- Quick and easy to organise
- interest rates tend to be low
What are the disadvantages to a bank loan?
- Have to pay off interest as well as original loan.
- can be hard to apply for a loans, you need substantial proof that you can repay them or valuable collateral e.g. real estate
- Business borrowers can be required to provide personal guarantees, which means the borrower’s personal assets can be seized in the event the business fails and is unable to repay all or part of a loan.
Bank Overdraft:
- Short/long?
- Internal/External?
- Capital/revenue?
- Short (can be long)
- External
- Revenue
What are the advantages to a Bank Overdraft?
- quick and east to arrange –> provides a good cash flow backup with minimum fuss
- Short-term can be cheaper than a loan
- good way to cover the period between money going out of and coming into a business.
What are the disadvantages to a bank Overdraft?
- Interest is repayable on the amount overdrawn and can be expensive if used over a longer period of time
- interest and fees on overdrafts are often at a higher rate than loans
- face large charges if you go over the agreed overdraft limit
Business angel:
- Short/Long?
- Internal/External?
- Capital/Revenue?
- Long
- External
- Capital
What are the advantages to a business angel?
- BAs are free to make investment decisions quickly
- no need for collateral - i.e. personal assets
- access to your investor’s sector knowledge and contacts
- no repayments or interest
What are the disadvantages to a business angel?
- not suitable for investments below £10,000 or more than £500,000
- takes longer to find a suitable BA investor
- giving up a share of your business
- less structural support available from a BA than from an investing company
Commercial mortgage:
- Short/Long?
- Internal/External?
- Capital/Revenue?
- Long
- External
- Capital
What are the advantages to Commercial Mortgage?
- Business has the use of the property
- Payments are spread over a period of time which is good for budgeting
- Once all repayments are made the business will own the asset
what are the disadvantages to a Commercial Mortgage?
- This is an expensive method compared to buying with cash
- If business does not keep up with repayments the property could be repossessed
Controlling stock levels:
- Short/Long?
- Internal/External?
- Capital/Revenue?
- Long
- Internal
- Revenue
What are the advantages of controlling stock levels?
- you dont have to pay, high storage costs, which includes space, insurance and workers
- if you have borrowed money to pay for stock by using JIT you save on interest fees
- stock doesnt go out of date
- able to change products if customer needs change
- less waste products
- less likely to be damaged as it hasnt been created yet
- employees can focus on tasks other than managing stock
- can reduce cost to production which makes product pricing more competitive
What are the disadvantages of controlling stock levels?
- possible loss of product or sales
- hard to cope with change in demand
- run out of stock - raw materials
- more panning needed thus more costs for computer systems etc
- economics of scales –> things cost more as they are being built as and when its needed
- if there is a problem with the supplier production stops
Credit Control:
- Short/Long?
- Internal/External?
- Capital/revenue?
- Short
- Internal
- Revenue
What are the advantages of Credit Control?
-No additional cost in getting this finance, it is part of the businesses’ normal operations
What are the disadvantages of Credit Control?
-There is a risk that debts owed can go bad and not be repaid
Factoring:
- Short/Long?
- Internal/External?
- Capital/Revenue?
- Short
- External
- Revenue
What is the advantages of Factoring?
- provides a large and quick boost to cash
- a company no longer needs to spend time and divert resources to the tedious, unpleasant and time-consuming tasks of invoice claiming and payment collection.
What are the disadvantages of Factoring?
- How the factor deals with your customers will affect what your customers thing of you, this could damage your reputation
- loss of profit as it is sold to the factoring company at a cheaper prices than it was original sold at e.g. 90%
Friends and Family:
- Short/Long?
- Internal/External?
- Capital/Revenue?
- can be both short and long
- External
- revenue and capital
What are the advantages of Friends and Family?
- Your friends and family already know you very well – and you know them
- They will listen to your pitch because they care about you
- They are inclined to say, “Yes.”
- They can give you the time to build your business on your own schedule
- They will let you develop your vision into something others will recognize and value
- You will be set up to hit major milestones and raise the next round of funding from professionals at higher valuations.
What are the disadvantages of Friends and Family?
- Harder to convince someone to lend you money
- Your friends and family may know you too well
- They may not be able to add value because they may not understand your business
- They may not appreciate your entrepreneurial drive
- You will feel highly responsible for any losses they may incur
- You may put the people you love best at risk, if they are giving you a significant portion of your savings
- You may damage close relationships
Grants:
- Short/Long?
- Internal/External?
- Capital/Revenue?
- long
- external
- Capital
What are the advantages of grants?
- Money is non- repayable
- help with a specific product or growth
What are the disadvantages of grants?
-Certain conditions may apply e.g. location
Not all businesses may be eligible for a grant
-you often only get the money after work has been completed (or a segment of work has been completed) so you also need enough in the bank to cover the costs till then
Hire Purchase:
- Short/Long?
- Internal/External?
- Capital/Revenue?
- Long but can be short
- External
- Capital
What are the advantages of Hire purchase?
- You can design a facility that fits you and your circumstances when signing the contract. Often the longer the term of the agreement, the lower the payments will be each month.
- The rate of interest and monthly payments are fixed throughout the duration of the agreement
What are the disadvantages of Hire Purchase?
- You are in a fixed contract, and therefore if your financial situation changes during that period and you can’t afford the agreed monthly repayments, you may lose the asset.
- Overall, you will pay more for the asset, if compared to buying for “cash”, as you’re paying interest in addition to the cost of the product.
Leasing:
- Short/Long?
- Internal/External?
- Capital/Revenue?
- Long
- External
- Capital
What are the advantages of leasing?
- it offers fixed rate financing; you pay at the same rate each month
- Businesses can have the use of up to date equipment immediately and payments are spread over a period of time which is good for budgeting
What are the disadvantages of leasing?
- Can be expensive
- as the asset never belongs to you, it remains the property of the leasing company during and after the lease
Personal sources?
- Short/Long?
- Internal/External?
- Capital/Revenue?
- Long and Short
- Internal
- Revenue and Capital
What are the advantages of personal sources?
- they can be easily dipped into (if necessary) when using an instant access savings account
- and no interest is paid on your money.
What are the disadvantages of personal sources?
- You can’t use that money for other things e.g. holidays.
- if you are using your own money, if the business fails you lose your money too
Peer to Peer lending:
- Short/Long?
- Internal/External?
- Capital/revenue?
- Long
- Internal
- Revenue
What are the advantages to Peer to Peer lending?
- better exchange rates than most saving accounts
- you can spend your money how you want
What are the disadvantages to Peer to Peer lending?
- you may have to wait for the money to be lent
Retained Profit:
- Short/Long?
- Internal/External?
- Capital/revenue?
- Short
- Internal
- Capital
What are the advantages to Retained Profits?
- No financial cost e.g. paying back a loan, dividends
- Can be put back into the business to increase growth
What are the disadvantages to Retained Profits?
- Finite amount and shareholders may stop investing if you retain too much.
- It’s slow. You run the risk of missing business opportunities while you build up the necessary funds
Sale and Leaseback?
- short/long?
- Internal/External?
- Capital/revenue?
- Long
- External
- Capital
What are the advantages of Sale and Leaseback?
- Only need to hire the machinery as and when you need it
- leasing company may do all maintenance
What are the disadvantages of Sale and Leaseback?
- will no longer own the property to freely use
- increased costs of having to buy the lease for the machinery
Selling assets:
- Short/Long?
- Internal/External?
- Capital/Revenue?
- Short
- Internal
- Capital
What are the advantages to Selling assets?
- Good way to raise finance from an asset that is no longer needed
What are the disadvantages to Selling assets?
- Some businesses are unlikely to have surplus assets to sell and can be a slow method of raising finance.
Share issue/Share capital:
- Short/Long?
- Internal/External?
- Capital/Revenue?
- Long
- External
- Capital
What are the advantages to Share issue/Share Capital?
- there is no need to mortgage property on these shares
- Have access to money you wouldn’t normally have access to for the business.
What are the disadvantages to Share issue/Share Capital?
- Shared Risk–> investors typically take on the risk of the business in the exchange for access to its profits or the opportunity to earn money from an increase in their ownership value
- Won’t have 100% control over the business.
Trade Credit:
- Short/Long?
- Internal/External?
- Capital/Revenue?
- Short
- External
- revenue
What are the advantages to Trade Credit?
- Business can sell the goods first and pay for them later
- This flexibility in purchasing methods also encourages customers to make larger purchases when prices are right than they might if they had to pay cash up front. Along with higher sales volume, trade credit often produces interest fees and late payment fees for creditors, which increases revenue.
What are the disadvantages to Trade Credit?
- Businesses need to carefully manage their cash flow to ensure they will have money available when the debt is due to be paid
- if they don’t use trade credit carefully they may pay higher costs for inventory
Venture Capital:
- Short/Long?
- Internal/External?
- Capital/Revenue?
- Long
- External
- Capital
What are the advantages to Venture Capital?
- Have access to money you wouldn’t normally have access to for the business.
- access to expert advice
What are the disadvantages to Venture Capital?
- lose some ownership of the business
- Shared Risk–> investors typically take on the risk of the business in the exchange for access to its profits or the opportunity to earn money from an increase in their ownership value
What goes into a business plan?
- Executive Summary
- The Opportunity
- Buying and Production
- Financial Forecasts
- The Business Structure
- The Market
- Personnel
- Premise and Equipment
- Financing
What comes under the Executive Summary section of a business plan?
-summary of the document into key points of what is going to be in the document
What goes in the Opportunity section of a business plan?
- sets out plan/product/project
- identifying why and would it be a success
What goes into the buying and production section of a business plan?
- Raw material –> what will be needed, where will it be sourced from, how much will it costs
- Production –> how long will it take to produce, how much machinery will be needed, how much will the machinery cost?
What does into the financial forecasts section of a business plan?
- sales forecast
- break-even
- cash flow
- trading profit/loss & balance sheet
What goes into the Business Structure section of a business plan?
- Sole Trader?
- Partnership?
- Company?
- – Justify why that has been selected
What goes into the Business’ Aims and Objectives section of a business plan?
- number of sales
- increasing sales
- market share
What goes into the market section of a business plan?
- Enough demand to be successful?
- any existing product
- identifying a gap
- Who is the target audience
What goes into the personnel section of a business plan?
- What do you need:
- Specific type of skill
- Unskilled
What goes into the Premises and Equipment section of a business plan?
-Buying or renting? –> costs
-Machinery –> rent, lease, hire purchase, buy,
costs? how many?
What goes into the Financing section of a business plan?
- How much do you need?
- How do you plan to get?
- Give up some control?
- Loan vs Share Capital vs debenture
What is Collateral?
an asset that might be sold to pay a lender when a loan cannot be repaid
What in an incorporated business?
a business model in which the business and the owner(s) have separate legal entities
What is limited liability?
a legal status that means shareholders can only lose the original amount they invested in the business
What is a long-term finance?
money borrowed for more than 12 months
What is a Right issues?
issuing new shares to existing shareholders at a discount
What is a short term finance?
money borrowed for 12 months or less
What is Undercapitalised?
a business not raising enough capital when setting up
What is an unincorporated business?
a business model in which there is no legal difference between the owner(s) and the business
What is Unlimited liability?
a status which means that business owners are liable for all business debts
What is liability?
the responsibility to meet the debts of a business in the event that payment cannot be made
What are the implications of unlimited liability?
- loss of personal assets
- legal responsible
- Ease to obtain funding
- Retention of control
What is the impact of loss of personal assets for a business with unlimited liability?
-if an unincorporated business fails and as loans or other liabilities outstanding thet owners would be required to meet these liabilities without cosideration for potential hardships that may cause
What is the impact of legal responsibility for a business with unlimited liability?
should an employee of the business commits an unlawful act, the owner could be responsible for any compensation due
What is the impact of Ease to obtain funding for a business with unlimited liability?
lenders will be more inclined to provide finance, as they know that they will be reimbursed if the business fails
What is the impact of retention of control for a business with unlimited liability?
owner(s) continue to have control over decision making without external interference
What are the implication of limited liability?
- No personal liability
- No legal recourse
- Raising finance through investors
- Accounting requirements
- Providing personal collateral
- Shareholder objectives
What is the impact of no personal liability for a business with limited liability?
- the main advantages to a shareholder in a limited company is the limitation of liability
- in the event the business fails the shareholders only lose their initial investment in the business
What is the impact of no legal recourse for a business with limited liability?
should an employee of the business commit an unlawful act, the business would be responsible for any compensation due, not the shareholdes
What is the impact of raising through investors for a business with limited liability?
as the business is protected by limited liability, people willing to invest large amounts of money through the purchase of shares
what is the impact of accounting requirements for a business with limited liability?
the additional accounting requirements of a companies means that investors are happy to invest as they can see the business’ assets and liabilities
What is the impact of providing personal collateral for a business with limited liability?
for smaller private limited companies the shareholders may be required to provide some personal collateral to banks in the event that the business fails
What is the impact of Shareholder objective for a business with limited liability?
investors may have differing objectives, original owners may look for developing community links, institutional investors look for profits
What funding is appropriate for unlimited liability businesses?
- personal savings
- retained profits
- mortgage
- unsecured bank loan
- peer to peer lending
- crowd funding
- bank overdraft
- grants
What funding appropriate for limited liability businesses?
- share capital
- debenture
- retained profits
- corporate mortgage
- venture capitalists
- business angels
- trade credit
- bank overdraft grants
- leasing
What is business plan?
a plan for the development of a business, giving details such as the products to be made, resources needed forecast such as costs, revenues and cash-flow
What is cash flow forecast?
the prediction of all expected receipts and expenses of a business over a future time period which shows the expected cash balance at the end of each month
What is cash inflows?
the flow of money into a business
What is Cash outflows?
the flow of cash out of a business
What is net cash flow?
the difference between cash flowing in and out of a business in any given time period
What is solvency?
the degree to which a business is able to meet its debts when they fall due
What is the importance of a business plan?
- provides direction for a business
- allows potential investors/lenders to see how realistic these expectations are
- will include projection for sales levels
- identifying cost (fixed and variable)
- Provide a cash flow forecast
- force owners to take an objective unbiased look at the potential success of the business
What is it referred to when inflows are greater than outflows?
positive cash-flow
-(doesnt equal a profit)
What is it referred to when inflows are less that outflows?
negative cash-flow
-( doesnt equal a loss)
