2.1.2 External Finance - methods of finance - long term

Question 1

Venture capital

Answer 1

Money that can be used for a business that is high risk, but has the potential to be successful

Question 2

Who provides Venture capital - 2

Answer 2

Business Angels - wealthy individuals who invest money into businesses
OR
venture capital firms (who have professional employees, ‘venture capitalists’)

Question 3

In return of venture capital what do businesses have to give up?

Answer 3

Businesses have to give up a share of their business.
And sometimes the investors want a big say in how the business is ran

Question 4

What can venture capitalists bring to the table -2

Answer 4

• a wealth of knowledge & expertise
• useful contacts

Question 5

2 - Advantages of venture capitalists

Answer 5

• can bring expertise into the business
• Money doesn’t have to be repaid back i.e no interest rates

Question 6

2 disadvantages of venture capitalists

Answer 6

Loss of control - venture capitalists may want to have a say in how the business is ran

Profit loss - issuing a share to venture capitalists

Question 7

Share

Answer 7

A portion of profits which is shared amongst those who own/invested into the company

Question 8

Share capital

What does this cause?

Answer 8

Money raised by selling shares in a business

which causes you to give a portion of your business away

Question 9

What companies can raise money by issuing share

Answer 9

Public and private limited companies

Question 10

Advantages of Share capital -2

Answer 10

• money doesn’t have to be paid like a loan + no interest rates
• Can raise a substantial amount of money

Question 11

Disadvantages of Share capital - 3

Answer 11

-No longer have fall control of the business. Shareholders have a say in how it is run

• dividends have to be paid back (a share of the profit)
• Costly and time consuming process selling shares - stock market flotation ( + only available to Public & Private limited companies)

Question 12

Loans

fixed amount of X

Answer 12

Where a fixed amount of money is borrowed and paid back over a fixed period of time with interest

Question 13

Interest What does it compensate for?

Answer 13

The money charged for borrowing money

• compensates for lenders giving you the money at that time as well as taking the risk

Question 14

What will banks ask for when you request a loan

Answer 14

Collateral - property or assets that a business can use to secure a loan

failure to repay loan means lender can seize collateral and sell it in order to get their money back

Question 15

What types of businesses may struggle to obtain a loan

Answer 15

Start ups because they may not have enough collateral

Question 16

Advantages of Loans - 2

Answer 16

• doesn’t have to give up share of profits or control
• Can be negotiated to meet the requirements of the business

Question 17

Disadvantages of loans - 3

Answer 17

• Has to pay back with interest (if interest rates go up so will the amount being paid back)
• Maybe difficult to obtain if you don’t have collateral
• Have to provide a suitable business plan to show how you’re going to pay back