raising finance Flashcards
what is finance used for
day to day spending
fixed assets
eages
what is a source of a finance
provider of finance
what is a method of finance
way provider gives finance
short term finance
finance using repaid within 1 year
long term finance
needed for long term investments
repaid within 3 years or more
internal sources of finance definition
come from within the business
examples of internal sources of finance
retained profit
owners capital
selling assets
study tip: ROS
retained profit
where profit is retained and built up for later investment
what businesses will not be able to use retained profit
newer businesses as dont yet have enough profit to save for later investments
adv of retained profit
business doesnt have to pay INTEREST
dis of retained profit
shareholders may want to receive profit as dividends
may cause business to miss out on investment opportunities
owners capital
money the owner invests into the business from their personal savings
sole traders and partnerships are likely to use when starting up
adv of owners capital
easy to access
doesn’t need paying back
dis of owners capital
amount of finance raised is limited
depends on personal wealth of owner
selling assets
sell some of their assets e.g old machinery to generate capital
what types of businesses is selling assets not suitable for
newer businesses as dont have any spare assets
unlikely to have assets they dont use
adv of selling assets
dont have to pay interst on money raised by selling assets
makes it cheap source of finance
dis of selling assets
means business no longer owns the asset
takes a long time to sell asset and get the cash
external sources of finance
comes from outside the business
examples of external sources of finance
crowd funding
other businesses
peer to peer lending
freinds and family
a
business angels
banks
study tip: FABB COP
friends and family
owners of small businesses may ask help financially from freinds and family
adv of using freinds and family
little or no interest
may agree to a flexible repayment
dis of freinds and family
may be limited depeding on how much person willing to give/ may be little amout
could put strain on relationship if they need money back quickly
banks
offer methods of finance e.g overdrafts, loans etc
adv of banks
terms and conditions of their financial products are clear
recognised financial institutions
dis of banks
strict lending criteria-can be hard for start ups and other risky businesses to be approved for finance
business angels
wealthy individuals who invest into a business where they see potential
usually offer guidance and advice too
adv of business angels
may have useful contacts and lots of business knowledge
dis of business angels
difficult and time consuming to find a business angel willing to invest
share of business has to be given up, may mean business angel gains some control of business and its decisions
crowd funding
raising money via the internet
each person contributes little amount but collectively alot can be raised
business puts details of new idea ut needs money for onto a website
details are made public so anyone can see and contribute with the funding
rewards are often donated such as early access to product ot discounted price upon release
adv of crowd funding
raises awareness of a product or brand with people using the website
increasing sales
dis of crowd funding
risk of ideas being copied once idea made public
if business idea fails, lots of people maybe aware, create negative reputation of the business
other businesses
business with large retained profit may want to invest in another business rather then saving profit
may want to do this if bank interests are low
peer to peer lending
operate online
allow individuals to lend money to other indiviaudls or businesses
lenders say how much they are willing to lend and indicate what sort of interest rate they want
borrowers say how much money they want to borrow and give some info about why they need the money and how long they want loan for l#
lending company assesses and matches borrowers with appropriate lenders
have lower interst rate then bank loan and attractive option if bank refuses to provide loan
short term methods of finance
grants
leasing
overdrafts
trade credit
study tip: glot
grants
fixed sum of money given to business by
Government
usually to fund specific projects
governemnt=grant two GS
adv of grants
DO NOT NEED TO BE PAID BACK
no interst need to be paid and no share of the business has to be given up
leasing
paying monthly sums of money in return for the use of an asset
after lease period, asset if returned back to leasing firm
dis of grants
application process can be time consuming and theres risk of not succesfully getting grant
doesnt get money till end of project so has to find another soyrce of finance in meantime
adv of leasing
no large up front sum of money to buy asset asset leased often up to date so less liekly to become faulty
usually maintenace and costs are included in lease
dis of leasing
may become more expensive then just buying asset in first place
more costly in long run then buying asset outright
overdrafts
banks let business have negative amount of money in bank account
adv of overdrafts
easy to arrange
flexible
business can borrow as much or little as they need
only pay interest on amount of overdraft they actually use
dis of overdrafts
charge high rates of interest on them
unsuitable for using in long term
trade credit
when business buys a good or service and doesnt have to pay it back straight away
business pays back within an agreed time limit
adv of trade credit
helps business with cash flow
dis of trade credit
miss out on discounts paying upfront
can charge fee if not payed back within the time
long term methods of finance examples
loans
share capital
venture capital
loans
where fixed amount of money is borrowed and payed back within a fixed period of time WITH INTEREST
loans can be such as banks, frinds and family, peer to peer lenders
adv of loans
good for newer businesses
dont have to pay back loan or interest
wont own any of the bsuiness so dont have to give up shares of the profits
dis of loans
not good for day to day running costs of business
difficult to arrange as loan provider will only lend money to business if think they are going to get it back
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