5 Sources of finance 43

Question 1

What is an Angel investor ?

Answer 1

Investors that back a business before it is operational, taking a full equity risk, so if the business fails the angel investor will lose everything

Question 2

What are Long-term sources of finance ?

Answer 2

Finances the whole business over many years 
E.G:
- Retained profits
- Venture capital 
- Share capital  
- Long-term bank loans

Question 3

What are Medium-term sources of finance ?

Answer 3

Finances major projects or assets with a long-life
E.G:
- Bank loans
- Government grants 
- Leasing

Question 4

What are Short-term sources of finance ?

Answer 4

Finances day-to-day trading of the business 
E.G:
- Bank overdraft
- Short-term bank loans
- Factoring

Question 5

What are the main sources of finance used by New Business?

Answer 5

Internal Sources

• Founder finance
• Retained profits
• Friends & family

External Sources

• Loans & grants
• Bank loan
• Business angels

Question 6

Whats are the advantages of Personal Sources ?

Answer 6

They are cheap
The entrepreneur keeps more control over the business
The more the founder puts in, the more the others will invest ( added confidence )

Question 7

What are the main sources of finance for Established Business?

Answer 7

Internal Sources
^ Retained Profits
^ Working Capital
^ Asset Disposals

External Sources

• Share issues
• Bank loans & overdrafts
• Peer-to-peer lending
• Venture Capital
• Debentures

Question 8

Retained Profits … ( INTERNAL )

Answer 8

DEF: Retained profit is the profit kept in the company rather than paid out to shareholders as a dividend.

Internal source for established businesses
Long-term source of finance

Question 9

What are the benefits and drawbacks of Retained Profits ?

Answer 9

BENEFITS
+ Cheap ( Not free )
+ Very flexible
+ Do not dilute the ownership of the company

DRAWBACKS
– A danger of hoarding cash
– Shareholders may prefer dividends if the business is not achieving sufficiently high returns on investment

Question 10

Asset Disposal ( INTERNAL )

Answer 10

Asset disposal is the removal of a long-term asset from the company’s accounting records.

E.g: spare land, surplus equipment
Often occurs after acquisitions

Question 11

Bank Loans ( EXTERNAL )

Answer 11

Medium or long-term finance
Loan provided over fixed period
Bank loans don’t provide much flexibility

Question 12

What are the Advantages and Disadvantages of Bank Loans?

Answer 12

ADVANTAGES
+ Lower interest rate than bank overdrafts
+ Appropriate method of financing fixed assets

DISADVANTAGES
– Requires security
– Harder to arrange than a bank overdraft

Question 13

Bank Overdrafts ( EXTERNAL )

Answer 13

Short-term finance

Excellent for helping a business handle seasonal fluctuation in cash flow

Question 14

What are the Advantages and Disadvantages of Bank Overdrafts?

Answer 14

ADVANTAGES
+ Relatively easy to arrange
+ Flexible - use as cash flow requires
+ Not secured on assets of business

DISADVANTAGES
– Can be withdrawn at short notice
– Higher interest rate than a bank loan

Question 15

Venture Capital [ Private Equity ] ( EXTERNAL )

Answer 15

Tend to focus on larger investments ( >$1m)

Medium-term finance

Question 16

What are the Advantages and Disadvantages of Venture Capital ?

Answer 16

ADVANTAGES
+ Can raise substantial amounts
+ Help original business owners realize their investment

DISADVANTAGES
– Venture capitalist require a high rate of return
– Loss of control - venture capitalist may take a majority share in company