Raising Finance

Question 1

What are forms of internal finance?

Answer 1

• Owners capital ; personal savings
• Retained profits
• Sale of assets

Question 2

What are advantages of using internal finance?

Answer 2

• No time delay
• No third party involvement
• Cheap
• No credit checks

Question 3

What are disadvantages of using internal finance?

Answer 3

• Limited
• Not tax-deductible (loans considered costs)
• No inflationary benefits (reduced value of debt)
• Opportunity costs

Question 4

What are external sources of finance?

Answer 4

• Family and friends
• Banks
• Peer to peer (lending money to unrelated individuals)
• business angels (invest between 10,000 to 100,000 in exchange for a stake in the business)
• crowd funding (groups of individuals invest)

Question 5

What are external methods of finance?

Answer 5

• Loans
• Share capital (sale of shares)
• venture capital (providers of funds for risky businesses)
• Overdrafts
• Leasing (contract to acquire use of resources)

Question 6

What is unlimited liability?

Answer 6

a legal status which means that business owners are liable for all business debts

Question 7

What is limited liability?

Answer 7

A legal status where business owners or shareholders have a separate identity to the business and its debts.

Question 8

What forms of finance might an unlimited use?

Answer 8

• Personal savings
• Retained profits
• Crowd funding
• Peer-to-peer lending
• Bank overdraft

Question 9

What forms of finance might a limited use?

Answer 9

• Share capital
• Debentures
• Retained profits
• Venture capitalists
• Business angels

Question 10

What are the implications and advantages of having unlimited liability?

Answer 10

Implications:
- Exposed to financial failure
- Liable for unlawful acts committed by owners or employees
Advantages:
- Easier to raise finance (lenders will be reimbursed if business defaults)
- More credible (more cautious)

Question 11

What are the implications and advantages of having limited liability?

Answer 11

Implications:
- Some cases owners are required to giver personal guarantees of the company’s debts to those lending - making them liable for debts
- Individuals are liable if the company has failure to maintain adequate records and accounts
Advantages:
- Owners private assets are protected
- Protection from legal claims
- Easier to raise larger amounts of money from investors

Question 12

What relevance does a business plan have in obtaining finance?

Answer 12

• Supports applications for finance
• Investors will want to know how their money is going to be spent
• Acts as a prospectus for floating on the stock market

Question 13

What are the uses of a cash-flow forecast?

Answer 13

• To identify the timing of cash shortages and surpluses
• Supporting applications for finance
• Enhance the planning process
• Monitor cash flow

Question 14

What are the disadvantages of cash-flow forecasts?

Answer 14

• Based on estimates
• Business activity is subject to external forces
• Uses resource to plan cash flow (time)
• Only focuses on one important variable - cash

Question 15

What is a cash-flow forecast?

Answer 15

The prediction of all expected receipts and expenses of a business over a future time period which shows the expected cash balance at the end of each month