Long Term Sources Of Finance Flashcards
What are 6 long term sources of finance
Personal savings , venture capital, share capital , bank loans , retained profit , crowdfunding
Define personal savings
Money that has been saved up by an entrepreneur. Does not cost a business as there are no interest rates applied .
What is venture capital
Money invested by an individual or group that is willing to take the risk of funding a new business . In exchange for an agreed share of the profits . Venture capitalists will want a return on their investment and a say in how the business is run .
What is share capital
Share capital is money raised by shareholders through the sale of ordinary shares.
Buying shares gives the buyer part ownership of the business-right to vote on changes to the business. This can slow down decision-making processes.
What are Advantages of share capital
permanent capital – Shareholders cannot have a refund on their shares.
There are no dividends to be paid if the business has a poor year because dividend are only paid if the business has made sufficient money to cover all of its costs
What are disadvantages of share capital
It dilutes control for the founders - This results in the founders having less control
The business is vulnerable for takeover - This is because the shares are sold publicly and if an individual or group buys enough shares, they can persuade other shareholders to vote for a new management team. ( must buy more than 50%)
What is a bank loan
Money lent to an individual or business by a bank which is paid off with interest over an agreed period of time .
Advantages of bank loan
Interest rate is fixed - so business know in advance what the cost of borrowing will be - this enables the business to plan ahead .
Disadvantages of bank loan
if the business is unable to repay the loan, the bank can demand the sale of the assets to raise money to pay back the loan.
What is the process of a business getting a bank loan
a business must apply to a bank. The bank then carries out credit checks to see the financial history and reliability of the applicant
Define retained profit
When a business makes a profit, it can leave some or all of this money in the business and reinvest it in order to expand
Does not have interest rates or dividends which makes it desirable.
Define crowdfunding
involves a large number of people investing small amounts of money in a business, usually online e.g crowdfunding websites include Crowdfunder, GoFundMe
Advantages of crowdfunding
It acts as a form of market research
It provides opportunities for individuals to start up a business even if they don’t have access to other sources of funding.
Disadvantages of crowd funding
The business must be interesting. - must be -appealing, interesting and innovative
can be difficult to reach the funding target- 33 per cent of businesses achieve their funding target.: statistics
