2.2 raising finance Flashcards
why is finance/ capital required?
- to start a business
- to grow a business
- to deal with cash-flow problems
what are the 3 sources of internal finance?
- owner’s capital / savings
- retained profit
- sale of assets
what are the 5 external sources of finance?
- banks
- crowd funding
- peer to peer funding
- business angels
- family and friends
definition of owners capital / savings
portion of income thats not spend on current expenditures
definition of retained profit
profit after all costs have been paid and all dividens have been paid to shareholders
definition of sale of assets
when a business sells/ transfers assets out of business (property, land, capital machinery)
definition of peer to peer funding
when people lend money to individuals or a business through an agreement.
what are business angels
investors who invest in the very early stages of a business taking a significant share/equity stake (dragons den)
definition of crowdfunding
obtaining external finance from many small investments
what is a bank loan?
a sum of borrowed money by a business from a bank
what are the 7 methods of finance?
- loans
- share capital
- venture capital
- overdrafts
- leasing
- trade credit
- grants
what is share capital?
finance raised by the sale of shares
what is a loan?
usually from the bank, involve providing a lump sum of cash which will we paid over an agreed period of time.
what is venture capital?
method of providing finance in higher risk investments - generally with a combination of loans and shares
definition of overdraft?
offers flexibility - allows the business to spend money even when they don’t have it/ account becomes negative.
definition of leasing
renting as asset that the business requires, if they can’t afford it
what is trade credit?
good and services provided by a supplier aren’t paid for immediately - “buy now, pay later”
definition of a grant?
a sum of money given by the government that doesn’t have to be paid back
adv of retained profit
- no interest
- doesn’t have to be paid back
- no dilution of shares
disadv of retained profit
- shareholders may have reduced dividens
adv of sales of assets
- no interest
- doesn’t have to be paid back
- no dilution of shares
disadv of sale of assets
- once gone, sold forever - may need it again in the future
adv of share capital
- no interest
- doesn’t have to be paid back
disadv of share capital
- dilution of shares - may upset existing shareholders
adv of loans
- no dilution of shares
disadv of loans
- interest payment
- set date to be paid back
adv of overdraft
- quick and easy to set up
- flexibility
- interest paid only on amount drawn
disadv of overdraft
- interest is higher than the loan
adv of leasing
- improves cash flow
- regular fixed payments = certainty
disadv of leasing
- expensive
- can be a long term commitment
adv of trade credit
- eases cash flow
disadv of trade credit
- if late paying, could damage credit history
liability (and finance)
responsibility of the owners of a business for the debt and finance of that business
unlimited liability
legal obligations of the owners of sole traders/ partnerships where they are all liable for all business debts
what types of businesses have limited liability and unlimited liability?
limited : incorporated
- private limited companies
- public limited companies
= share capital, loans and overdrafts, angel and venture capital, trade credit, leasing, crowdfunding
unlimited : unincorporated
- sole traders
- partnerships
= owners’ capital, loans and overdrafts, trade credit, leasing
what is a business plan?
gives a summary on the objectives of a business and gives a detailed plan on how they’re meant to be met
what can a business plan give?
- gives a sense of direction for owner and employees
- gives a clear target
- can be used to judge the success of the business
what is a cash-flow forecast?
shows the movement of money into and out of a business over a period of time
what info does the cashflow forecast give?
- opening balance
- cash inflow
- cash outflow
- monthly balance
- closing balance
advantages of cash-flow forecasts
- gives an early warning/ identification of problems
- control of stock
- gives target and motivates those involved
limitations of cash-flow forecasts
- depends on the accuracy of the figures
- may limit flexibility
