Raising Finance

Question 0

Ordinary share capital

Answer 0

Money given to a company in return for share capital, giving them part ownership, which entitles them to a share of the profits. Owning 51% of shares guarantees overall control.

Question 1

Sources of finance

Answer 1

Ordinary share capital, venture capital, loan capital, bank overdrafts and personal sources.

Question 2

Advantages of ordinary share capital

Answer 2

• limited liability encourages shareholders to invest as it restricts the amount of money they could lose.
• new shareholder=more expertise/ideas
• doesn’t need to be repaid
• dividend payments aren’t necessary, if they can’t be afforded.

Question 3

Disadvantages of ordinary share capital

Answer 3

• new shareholders may not have same values as original owners
• shareholders will expect good dividends in profitable years, meaning more expensive payments.
• original owners may lose control

Question 4

Loan capital (bank loan)

Answer 4

An agreed upon sum of money provided to a firm or an individual by a bank for a specific purpose. Money must be repaid with interest after an agreed period of time.

Question 5

Advantages of bank loans

Answer 5

• size of loan and period of repayment can be organised to match the need a of business.
• interest rates are lower because of the security provided.
• interest rates and repayments are agreed in advance, making it easy to budget the schedule for repayments.

Question 6

Disadvantages of bank loans

Answer 6

• difficult/ costly to repay the loan early
• start-up business are charged higher interest rates because they’re unable to provide the guarantees a bank might like.
• size of loan limited by amount of collateral that can be provided, rather than amount of money that can be paid back by business.

Question 7

Bank overdrafts

Answer 7

When a bank allows an organisation to overspend it’s current account at the bank up to an agreed limit and for a stated time period.

Question 8

Advantages of bank overdrafts

Answer 8

• they are extremely flexible and useful for temporary cash flow problems
• interest only paid on the amount of overdraft being used.
• collateral isn’t required
• useful for seasonal business.

Question 9

Disadvantages of bank overdrafts

Answer 9

• Interest rate charged is higher than for a loan.

- banks can demand immediate repayment(rare)

Question 10

Venture capital

Answer 10

Finance provided to small/medium-sized firms that seek growth, but are considered too risky to invest in by share buyers or other lenders.

Question 11

Advantages of venture capital

Answer 11

• available to firms that are unable to get finance from other investors because of the risk involved.
• allow interest or dividends to be delayed.
• provide advice and guidance.

Question 12

Disadvantages of venture capital

Answer 12

• want a significant share of the business in return.
• high interest payments or dividends
• original owner may lose independence as venture capitalist exerts too much influence.

Question 13

Personal sources of finance

Answer 13

Personal savings
Mortgages
Selling private assets
Borrowing from family and friends

Question 14

Advantages of personal savings

Answer 14

• incredibly cheap source of finance.

- enables owner to keep control.

Question 15

Disadvantages of personal savings

Answer 15

• can run out quickly

- not enough funds to finance a new business.

Question 16

Advantages of a mortage

Answer 16

• A second mortgage allows a homeowner to raise a substantial amount of money.
• lower interest rate.

Question 17

Disadvantages of mortgages

Answer 17

• owner can have property taken

- many entrepreneurs may own a valuable property.