miss duddigan-raising finance Flashcards
internal sources of finance
Retained profit
owners capital
selling assets
e
owners capital
-money the owner invest in a business often personal savings
-sole traders and partnerships use when starting up
-doesn’t need paying back
-usually smaller businesses as no need for large sum of money
Advantages and disadvantages of owners capital
adv-easy access, doesn’t need paying back
dis-limited amount can be raised depending on personal wealth of owner
selling assets
selling assets not needed e.g machinery
not good for new businesses as dont have many spare assets
only appropriate to those with spare assets
Advantages and disadvantages of selling assets
adv-no interest needs to be paid means cheap source of finance
dis-no longer own asset
may be time consuming to get cash
retained profit
profit is retained and built up for later investment
recent starters wont have enough profit to retain
adv-no interest
dis-shareholders may object as want dividends
may cause business to miss out on investment opportunities
external sources of finance
come from outside the business
Banks
Business angels
Crowd funding
Peer to peer lending
Family and friends
Other businesses
banks
offer methods of finance e.g. loans, overdrafts
ADV-help with advise
clear terms and conditions
DIS-strict lending criteria
business angels
wealthy individuals who invest into an innovative or new business inn hope to give it chance to be successful
in return, they have share of business
ADV-business knowledge and useful contacts
DIS-due to having share, may make decisions and take over a little bit
time consuming to get a business angel willing to invest
crowd funding
raising money from internet
often used by start ups
business puts up new idea onto website and people can contribute by donating if they like idea
rewards often offered for those who donate e.g. early access to product, discounted prices
ADV-increases awareness, increases sales
DIS-risk of idea being copied, if idea fails, loads seen it as public increasing risk of bad reputation
peer to peer lending
used by the internet
allow businesses to lend to other businesses
lender say how much they willing to lend and how much interest they want
borrower says why they want the loan and how long for
company assesses how risky and matches them with appropriate lender
good option if loan from bank doesn’t work
family and friends
getting money from a family or friend
adv-may be gift so have no part in it
little or no interest
dis-may be small amount
if wanting to pay them back, may cause strain on relationship
short term methods of finance
Grants
Leasing
Overdrafts
Trade credit
grants
fixed sum of money given from government
have to go through application process, if successful get grant given
given to fund specific projects
needs to provide lots of info about project
ADV-no interest, no share given up, does not need to be payed back
DIS-application process long and time consuming
often does not get money till after project
leasing
paying to use other business asset
pay in monthly sums rather then all at once
lease returned
ADV-dont have to pay large up front sum
DIS-may become more expensive in the end then just buying the asset in first place
overdrafts
bank allows business to have negative amount in bank account
ADV-flexible
only have to pay interest on the amount of overdraft you actually use
DIS-can charge high lates of interest
not suitable in long term
trade credit
gives business more time to pay money it owes
business buys good/service from business but doesn’t have to pay back straight away
has to pay back within time limit
ADV-helps a businesses cash flow
DIS-may be charged fees if not payed all back within time limit agreed
long term methods of finance
loans
share capital
venture capital
loans
fixed amount of money is borrowed and then paid back with interest within a time period
ADV-good long term source of finance
DIS-difficult to arrange
loan provider will only lend if feel they will get it back
has to be repaid
share capital
selling shares to raise money
ADV-does not have to be repaid
DIS-original owner no longer owns all business
shareholders may want their dividends
costly and time consuming
venture capital
helps businesses with high growth potential
business angels may invest or professional employees(venture capitalist)
ADV-expert advise
DIS-get a share of business so may get too involved
unlimited liability
used in partnerships and sole traders
any business debts become perosnal debts
e.g can sell perosnal assests like their house to pay off business debts
limited liability
private and public limited companies
owners not responsible for debts of business
most they can lose is the amount they invested into business
advantages of limited companies
much easie to encourgae people to join as only have chnace of losing out on what they invest in only
sole traders and partners more likely to use internal and external methods of finance
-can raise a lot of money via share capital
limited amount of people willing to invest in a unlimited company
business plans
document that outlines what a business plans to achieve and how
useful for new business
useful for estabilished business to check on track
what does a business plan contain
business overview (who is setting up business and why, location etc)
aims and objectives
financial forecasts
sale strategies
who are business plans helpful for
bsuinesses wanting to get external finance
good plan shows owner knows what they are doing
helps interest investors showing that everything is well thought out
shows low risks of business failing
shows how profitable business wants to be and when
helps a business get cheap finance if person can see will get payed back on time
cash flow forecasts
show cash inflows and cash outflows
what are cash inflows
sum of money received by business e.g loans, products
working capital
amount business has available for day to day spending
cash outflows
sum of money paid out by business e.g pay wages, raw materials
what is being on credit
where customer buys product then pays it back in time period
what are people called who owe the business money
debtors
what is trade credit
when business does not need to pay back straight away
what do cash flow forecasts do
make sure business does not run out of cash
helps business make decisions
show how much money is expected to go into a business and how much is expected to leave a business
managers use to assure they have enough money to pay employyes and suppilers
why is a cash flow forecast useful
shows business owners have done their research
have an idea of where business is going to be in future
can be used to check firm isn’t holding too much cash
