Raising Finance Flashcards
State 2 disadvantages of Ordinary Share Capital
Loss of control by owners
Share decision making
Dividends may be expected
Potential conflict
Only an option if Ltd or Plc
State 2 advantages of Ordinary Share Capital
Potential to raise more finance due to a wider number of investors
Limited liability
Dividend payments are optional
May benefit from additional expertise
Investment is permanent
No need to repay investment
What is Ordinary Share Capital?
Investment given to a business by shareholders in return for a share of profit and voting right
What is Loan Capital?
Money aquired by the business which must be repaid with interest e.g. a bank loan or overdraft
What is a Bank Loan
A set ammount of money provided to a business to be repaid, with interest, over a predetermined period of time
What are Bank Loans used for?
Often used to buy capital equipment
May be secured against an asset
Medium to long term source of finance
What is an Overdraft?
A bank allows the account holder to withdraw more money than they have in the current account up to an agreed limit.
An overdraft can be used as…
A short term finance solution
State 2 advantages of a Bank Loan
Quick and easy to secure
Fixed interest rates allowing firms to budget
Improved cash flow- vital for small businesses
The borrower retains ownership of the company
Size and length of loan can be chosen to match the needs of the business
State 2 disadvantages of a Bank Loan
Interest must be paid regardless of profit- this particularly hurts a highly geared company (at least 50% capital from loans)
A firm normally provides security against its assets
Often more expensive than other forms of finance- a firm can be charged for early payment.
What is Venture Capital?
investment from an established business person or business into a new business in return for a percentage equity in the new business.
What are Personal Sources?
When an entrepreneur invests their own money in a business
Name 1 factor influencing the choice of finance
Legal structure- Equity finance i.e shares are only an option for companies. Partnership has more potential for personal sources. Risk due to liability.
Owner’s preferences- Attitude to risk. Willingness to share decision making. Loss of control.
Reason for finance- Length of time and amount needed. Purpose e.g. capital equipment or short term cash flow.
Availability- Business plan. Collateral i.e. an asset against which a loan can be secured
State 2 advantages of Venture Capital
Large sums of money for investment
Expertise to help the business
Makes it easier to attract of sources of finance
Provides the required capital for start up
State 2 disadvantages of Venture Capital
A long and complex process
Expert financial projections are likely to be required
Initially expensive for the firm e.g. legal and accounting fee’s
Partial loss of ownership
State 2 disadvantages of Overdrafts
The bank can call it in at any time
Only available from a current bank account
Interest payments tend to be variable- making it more difficult to budget
Interest rates tend to be higher than loans
Banks may secure the overdraft against the businesses assets.
State 2 advantages of Overdrafts
Only borrows when required allowing flexibility
Only pay interest on the actual amount of money overdrawn
Quick and easy to arrange
No charges for paying off the overdraft
Short term solution to cash flow problems
What is Capital Expenditure used for?
To buy assets such as equipment, machinery, vehicles or premises.
State 2 advantages of Personal Sources
No interest or dividend payments therefore a cheap option
No loss of control
Easy to obtain (assuming availability)
State 2 disadvantages of Personal Sources
Opportunity cost of investment
May only be limited funds avaliable
Risk
