Raising Finance Flashcards
Ordinary share capital definition
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.
Advantages of ordinary share capital
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
Disadvantages of ordinary share capital
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
Loan capital definition
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.
Bank loan definition
A sum of money provided to a firm or an individual by a bank for a specific, agreed purpose.
Advantages of bank loans
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
Disadvantages of bank loans
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
Bank overdrafts definition
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
Advantages of bank overdrafts
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
Disadvantages of bank overdrafts
Interest rate charged is usually higher than for a loan
Banks can demand immediate repayment (although rare)
Venture capital definition
Venture capital is finance that is provided to small or medium sized firms that seek growth, however risky
Advantages of venture capital
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
Disadvantages of venture capital
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
Personal sources definition
Money provided by the owner or owners of the business from their own savings or personal wealth
Personal savings advantages (personal source)
Cheap source
Enables owner to keep control of the business
Disadvantages of personal savings
Can quickly loose their savings
May not have sufficient savings to finance a new business
Mortgage advantages (personal sources)
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
Mortgage disadvantages (personal sources)
If the business is unsuccessful the owner may lose their property
Many entrepreneurs will not own a sufficiently valuable property
Private borrowing from friends and family advantages (personal sources)
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
Private borrowings from friends and family disadvantages (personal sources)
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
Selling private assets advantages (personal sources)
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
Selling private assets disadvantages
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
Types of Long term finance
Personal sources
Ordinary share capital
Loan capital/bank loan
Venture capital
Types of medium term finance
Personal sources
Loan capital/bank loan
Venture capital
Short term finance
Personal sources
Bank overdraft
Deciding what source of finance to use what following factors should be considered?
Legal structure of the business Use of the finance Amount required Level of risk Views of the owners
Main sources of finance for a start-up business
Ordinary share capital Venture capital Loan capital Bank overdrafts Personal sources
