Raising Finance

Question 1

The four sources of finance for a new business

Answer 1

LOAN CAPITAL

ORDINARY SHARE CAPITAL

VENTURE CAPITAL

PERSONAL SOURCES

Question 2

Loan Capital

Answer 2

Bank Loans - These are usually for a specific time period and carry a fixed rate.
Bank Overdrafts - An extension of credit from a bank. This allows firms to borrow money from their bank account.

Question 3

Bank Loan - ADVANTAGES

Answer 3

• Quick and easy to secure
• Fixed interest rates allowing firms to budget
• Improved cash flow - vital for a small business
• The borrower retains ownership of the company

Question 4

Bank Loan - DISAVANTAGES

Answer 4

• Interest must be paid - this particularly hurts a highly geared company (at least 50% of its capital from loans)
• A firm normally provides security (collateral) against its assets
• Often more expensive than other forms of finance - a firm can be charged for early payment

Question 5

Bank Overdrafts - DISADVANTAGES

Answer 5

• The bank can call it in at any time
• Only available from your current bank account
• Interest payments tend to be variable - making it more difficult to budget
• Banks may secure the overdraft against the business assets

Question 6

Bank Overdrafts - DISADVANTAGES

Answer 6

• Only borrowed when required allowing flexibility
• Only pay for the money borrowed
• Quick and easy to arrange
• No charges for paying off the overdraft

Question 7

Ordinary share capital

Answer 7

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