Raising Finance- Internal Finance Flashcards
What is external finance?
The investment for the business that is obtained from banks, investors and lenders outside of the business
What is the difference between a source of finance and a method of finance?
Source of finance-Where the finance has come from
Method of finance- This is the use of a finance- or what use it would be suitable for
What are some examples of sources of finance?
- Family and friend
- Banks
- Crowd funding
What are the advantages of using friends and family as a source of finance?
- loans from friends and family will probably be over long time with low rates of interest
- they are unlikely to need a business plan so you wouldn’t need to write one
What are the disadvantages of Family and Friends as a financial income?
- may cause tension and problems if the finance is not repaid or the business does not flourish
- may demand their money back at short notice
What are the advantages of banks as a source of finance?
- Banks will lend to a business without asking for a % if the ownership
- Banks will allow the business owner to continue running the business their own way and not interfere
What are the disadvantages of banks as a source of finance?
- Bank loans can be expensive compared to other sources of finance and interest must be paid back on time
- It may be hard for a new business owner to obtain a loan as they have no historical sales data to show the bank
What are the advantages peer to peer funding as the source of finance?
- Businesses can get access to funding within a week once approved
- Business owners can apply online
- Investors can expect returns of 6-7% whereas a savings account might only give them 3%
What are the disadvantages of peer to peer funding as a source of finance?
- peer to peer loans are classified as private business loans so the money for the loan comes from several investors or small businesses
What are Business angels?
Someone who offers to lend their personal disposable finance
What are the advantages of business angels as a source of finance?
- Angels are free to make investment decisions quickly
- The owner gets access to your investor’s sector knowledge and contacts
- The owner gets access to angels mentoring or management skills
- The owner will have no repayments or interest on the money lent
What are the disadvantages of business angels as a source of finance?
- Not suitable for investments below £10,000 or more than £500,000
- Owner needs to give up a share of the business
What is crowd funding?
where a large number of people fund a project over the internet making small investments each, 3 ways to fund:
• Donate: no money back, but rewards like tickets or a newsletter
• Lend: get money back with interest and satisfaction of contributing to success of a small business
• Invest: Invest in a business in exchange for equity or shares which may increase in value
What are the advantages of crowd funding as a source of finance?
• Good alternative to loans for small business owners
• Finance can be obtained without paying upfront fees
• The business can generate funds and also promote the business at the same time
What are the disadvantages of crowd funding as a source of finance?
The business will need to show case their idea to investors and may need to put together a video and other promotional material to attract investors
What are the 7 methods of finance?
- loans
- share capital
- venture capital
- overdrafts
- leasing
- trade credit
- grants
What are the advantages of loans?
• Banks will not ask for a % of the business or get involved in the running of the business
• Getting into a high street bank to apply for a business loan is a straightforward process
What are the disadvantages of loans?
• A bank will charge interest on the loan
• Not very flexible, the business may incur a penalty if they decide to settle the loan early
• A bank will ask for security or collateral on a loan this may be a house or another asset that can be seized if the loan is not paid back
What are the advantages of share capital?
Investors are often prepared to provide extra funding as the business grows
• More cost effective way to raise finance than a loan – no interest to pay back
• Finance is based on acquiring more equity rather getting further into debt
What are the disadvantages of share capital?
• Potential investors may require a great deal of background information before they buy the shares
• The more shares that are sold, the more the profits have to be divided up and paid out to investors as dividends
• Can be expensive and slow process to organise
What’s are the advantages of Venture Capital?
• Useful if the business is looking to raise a large amount of money in a short space of time e.g. £1 million
• The business gets all the skills of the venture capital business, their network and links may increase revenue streams
• Great for owners who have been refused a loan from a bank
What’s are the disadvantages of Venture Capital?
• Venture capital firms look for a strong business plan, sound management and a proven track record, making it difficult for start-up firms
• Venture capital firms typically want 20-30% stake in the business
What’s are the advantages of Overdraft?
• For a business owner this would idea as a quick fix method to tide the business over a difficult month of trading
• An overdraft can be arranged on the phone
• or online with an instant decision from the bank
• The business will only pay interest on the amount of money that they are overdrawn
• As soon as the business improves trading they can easily pay back the overdraft to the bank and the interest charges will stop
What are the disadvantages of overdrafts?
• If the business goes over this amount the overdraft will be “unauthorised” and the business will be charged heavily
• Very expensive source of finance, very high charges and interest rates
• Not suitable for large amounts over a long period of time
What are the advantages of leasing?
• This is a lower monthly costs for a business owner than a loan
• Often business leases can be arranged without any advanced fees being paid
• The leasing firm maintain the equipment, vans, cars etc. so the business will always have reliable working equipment
What are the disadvantages of leasing?
• Leasing is often over a fixed term, if the business changes its mind and wants to lease from a different company, contracts may be difficult to get out of
What is finance?
The management of the investment needed to open, run and grow a business
What are the five reasons for raising finance?
- To pay debts
- Overdraft
- To expand
- To start up a business
- To buy stock
What is owners capital?
Shows the stake the owner has in the business
When is owners capital appropriate?
Sole traders and partnerships would be the two business forms which would mostly use owners capital to expand and to grow
What are the advantages and disadvantages of retained profits?
Advantage is there’s no interest to pay
Disadvantage is once it’s used it has gone and cannot be used elsewhere in the business
When is retained profit appropriate?
- a business in its first year won’t have any retained profits
- if a business has not been profitable then there won’t be any retained profits
What is the downside of selling assets?
The asset won’t be on the balance sheet of the company meaning the business will look less attractive to investors
What are the advantages of selling assets?
- larger businesses who have lots of products can improve efficiency and increase capacity utilisation
- Assets from one brand can be sold off to raise finance to invest in another
What are the disadvantages of selling assets?
- may not raise enough money for growth or expansion
- may draw questions into how well the business is being run if it’s selling its assets
- a new start I would be in a lot of trouble if they needed to sell their assets
What are the advantages of trade credit?
• Business can sell the goods before the stock needs to be paid for, so can make a profit before the costs have to be paid
• No interest has to be paid on trade credit
• Businesses that pay regularly on time can build relationships with their suppliers and secure better deals
What is limited liability?
A business owner is only liable for their original investment should the business fall into debt, their personal possessions are not at risk
What is unlimited liability?
That if a business has debts the owner must pay even if this means selling their possessions to find the money
What is a business plan?
A document whitch sets out the future plans for a business
What is the purpose of a business plan?
- To help set up a new business
- To help the business raise finance
- To help the business to set objectives
- To outline how functions of the business will be organised
What are the limitations of cash flow forecasts?
- only a 12 month snapshot which is short term to make any concrete decisions about the business
- only a forecast (actual sales or expenses could be higher)
- owner may overstate expenditure or understate income
