Raising Finance

Question 1

Ordinary share capital definition

Answer 1

Is money given to a company by shareholders in return for a share certificate, giving them part ownership of the company and entitles them to a share of the profits.

Question 2

Advantages of ordinary share capital

Answer 2

Limited liability- restricts amount of money shareholders can loose
Does not need to be repaid
Bringing new shareholders into a small business can often mean that further expertise is brought into the business

Question 3

Disadvantages of ordinary share capital

Answer 3

In profitable years ordinary shareholder will expect good dividends and this is likely to be more expensive than the interest on a loan
Original aims of business may be lost as new shareholders may not have same values as original owners
Original owners may loose control of business as more shares are sold to raise finance

Question 4

Loan capital definition

Answer 4

Money received by an organisation in return for the organisations agreement to pay interest during the period of the loan and to repay the loan within an agreed time.

Question 5

Bank loan definition

Answer 5

A sum of money provided to a firm or an individual by a bank for a specific, agreed purpose.

Question 6

Advantages of bank loans

Answer 6

Interest rates normally lower because of security provided
Interest rates and repayments are fixed in advance, easy to budget the schedule for repayments
Size of the loan and the period of repayment can be organised to match the exact needs of the firm

Question 7

Disadvantages of bank loans

Answer 7

Often difficult to repay a loan early
Often costly to repay a loan early
Start-ups are often charged higher rates of interest because they are unable to provide the guarantees that the bank manager might like

Question 8

Bank overdrafts definition

Answer 8

When a bank allows an organisation to over spend its current account at the bank up to a agreed overdraft limit and for a stated time period

Question 9

Advantages of bank overdrafts

Answer 9

Extremely flexible and useful for temporary cash flow problems
Interest only paid on the amount of the overdraft being used
Security not usually required
Useful to seasonal businesses which are likely to experience some cash flow problems at certain times of the year

Question 10

Disadvantages of bank overdrafts

Answer 10

Interest rate charged is usually higher than for a loan

Banks can demand immediate repayment (although rare)

Question 11

Venture capital definition

Answer 11

Venture capital is finance that is provided to small or medium sized firms that seek growth, however risky

Question 12

Advantages of venture capital

Answer 12

Available to firms that are unable to get finance from other sources because of the risk involved
Sometimes allow interest or dividends to be delayed
May provide advice and guidance

Question 13

Disadvantages of venture capital

Answer 13

Venture capitalists often want a significant share of the business in return
Often want high interest payments
Owner may loose independence from venture capitalists exerting too much influence

Question 14

Personal sources definition

Answer 14

Money provided by the owner or owners of the business from their own savings or personal wealth

Question 15

Personal savings advantages (personal source)

Answer 15

Cheap source

Enables owner to keep control of the business

Question 16

Disadvantages of personal savings

Answer 16

Can quickly loose their savings

May not have sufficient savings to finance a new business

Question 17

Mortgage advantages (personal sources)

Answer 17

Second mortgage may enable a homeowner to raise a substantial sum of money
Interest rates charged on mortgages tend to be lower than other loans

Question 18

Mortgage disadvantages (personal sources)

Answer 18

If the business is unsuccessful the owner may lose their property
Many entrepreneurs will not own a sufficiently valuable property

Question 19

Private borrowing from friends and family advantages (personal sources)

Answer 19

Friends and family may be prepared to lend money when the bank refuses
Often provide easier repayment terms
Additional money raised through friends and family may encourage a bank manager to offer a further loan

Question 20

Private borrowings from friends and family disadvantages (personal sources)

Answer 20

Owing money to friends and family can increase stress

It can undermine friendships, as there may be disputes about when and how much money should be repaid

Question 21

Selling private assets advantages (personal sources)

Answer 21

May mean that an asset that was previously of no real use to a person is used productively
Is possible that the asset can be leased back by the owner and still used productively

Question 22

Selling private assets disadvantages

Answer 22

Can cause family tensions, as the business may be seen to be benefiting at the expense of the family
Unlikely that large sums of money can be raised by selling off private assets

Question 23

Types of Long term finance

Answer 23

Personal sources
Ordinary share capital
Loan capital/bank loan
Venture capital

Question 24

Types of medium term finance

Answer 24

Personal sources
Loan capital/bank loan
Venture capital

Question 25

Short term finance

Answer 25

Personal sources

Bank overdraft

Question 26

Deciding what source of finance to use what following factors should be considered?

Answer 26

Legal structure of the business 
Use of the finance 
Amount required 
Level of risk 
Views of the owners

Question 27

Main sources of finance for a start-up business

Answer 27

Ordinary share capital 
Venture capital 
Loan capital 
Bank overdrafts
Personal sources