Finance - Sources of finance/advice Flashcards
Name 8 ways of raising finance.
- Selling shares
- Using owners funds (owner’s money / savings)
- Bank loan
- Mortgage
- Overdraft
- Borrow money from friends and family
- Hire purchase and leasing assets rather than buy them
Why do businesses need to raise finance?
To ensure the business is able to operate:
- Rent or buy a building
- Buy or renting vehicles for cars/vans
- Advertising/marketing the business
- Buy or renting equipment and machinery for the business
- Purchasing raw materials/stock
What is meant by owners funds?
This is when the owners put money into the business. The greater the number of owners (partnership or company) the potentially more funds available.
Owners funds are normally used in sole trader and partnership businesses whereas in Companies shares can be issued.
How do bank loans work?
Bank can make loans to businesses which are repaid by instalments over a number of years and the bank will charge interest. The interest charged by the bank is its profit.
Banks may also ask for collateral as part of a loan such as the owners house or an asset of the business. This is often called security and a loan which involves security is a secured loan.
What is a mortgage?
Mortgages are loans from banks and building societies that are used to buy land or buildings.
Mortgages are normally very long loans of up to 30 years which are secured on the land or premises. If there is a failure to repay the mortgage the bank has the right to sell the asset (land or building).
What is meant by overdraft?
Overdrafts are where the bank account goes into debt (money is borrowed which takes the account into debt). This allows flexibility with a businesses cash flow but interest is payable on an overdraft.
What are the advantages and disadvantages of borrowing money from friends and family?
Advantages - easy to arrange and often without interest.
Disadvantages - money may be limited, may need to be repaid at short notice and will not require a business plan which is not good
How can hire purchase and leasing help a business?
Hire purchase is a way of purchasing assets by instalments - whilst convenient it can be an expensive option
Leasing - this is where a business rents vehicles or other things like photocopiers. Whilst it may work out more expensive over the long run it is more affordable and convenient for the business
What is a government grant?
Government offers money via a grant to businesses which should usually be used to do something like creating jobs (especially in poor areas). Often an entrepreneur will have to financially match the grant. However there are different grants for different things and they also come from the EU.
What is meant by issuing shares?
Only companies can sell shares to shareholders in order to start a business. No interest is payable do cheap sources of finance but will have to pay share of profits (known as dividends).
What is meant by “raising finance”?
This is where an entrepreneur raises money for a business
How do websites provide advice to small businesses?
There are a number of websites but the best known one is Smallbusiness.co.uk.
This website us sponsored by one of UK’s largest banks - Lloyds Bank and offers advice on starting up a business, finance, marketing, employing people and the law for small businesses.
