theme 2- raising finance Flashcards
what is internal source of finance
finance can be raised within the business, using the owners money, selling assets or putting profits back into the business:
- owners capital= money owner invests into the business often from other personal savings. sole traders or partnerships are likely to use this when they are starting up. it is easy access however depends on personal wealth
- selling assets- businesses can sell some of their assets to generate capital, however business no longer owns these assets. no interest needs to be paid on selling them
- retained profit= profit built up over the years for later investment, cant be used by all businesses as they may not be able to make enough profit to retain much
what are external sources of finance
family and friends= owners of small or new businesses may ask family and friends to help them out. amount available may only be small
banks= loan, overdrafts. banks are recognised financial institution. high interest rate
peer to peer lenders= operate online. individuals lend money to other individuals
business angels= wealthy individuals who invest money into new or innovative businesses that they think have the potential to be successful. offer guidance too, may have lots of business knowledge, however can be difficult and time consuming to find a business angel willing to invest
crowd funding= raising money from a large number of people usually via the internet. by doing this business also raises awareness of its product and brand to people. risk of idea being copied and started before yours
other businesses= business with large retained profit may want to invest in another business rather than save their profit
methods of finance
overdrafts=bank lets a business have negative amount of money, only pay interest on amount of overdraft they actually use
leasing= paying to use another firms asset. business doesnt have to pay a large upfront some however can be more costly in the long run
grants= fixed some of money given to a business, often by governmentthat doesnt need to be repaid. can be long time and time consuming
trade credit= when business buys a good or service and doesnt have to pay straight away- business pays within an agreed time limit ( usually between 30 and 90 days). gives business more time to pay money it owes, can help with cashflow.
what are long term methods of finance
- loans= to finance their projects in the long term from banks, family friends. security may be needed for a loan often in the form of property in case it isnt paid back
- share capital= for limited companies, money raised by selling shares, money doesnt need to be repaid. shareholders would need to share profit and may lose some of their control over the business
- venture capital= money used as a method of finance for a business that is high risk but has potential to be successful. can be provided by business angels or by professional employees working on behalf of a venture capital firm. in return for venture capital, a firm has to give up a share of their business and sometimes teh investors want a big say in how the business is run
unlimited liability
business debts become personal debts of the owners- business owners can be forced to sell personal assets to pay off business ebts
limited liability
owners arent personally responsible for the debts of the business- has separate legal identity from its owners
how does liability affect methods and sources of finance
- limited liability fins it easier to encourage people to invest in their business than those with unlimited liability- people more willing to become part owners of a business if they know they’ll only lose as much as they’ve put in if the firm goes bust
what is a business plan
document that outlines what a business plans to achieve and how it plans to do so.
- a way of monitoring performance and keeping on track
- include business overview, aims and objectives, marketing and sales startegy, financial forecasts (cash flowforecast, sales forecast, break even analysis, expenditure budget, projected statement of comprehensive income, preojected statement of financial position)
- it is good for a business trying to get external finance
- good business plan proves they have done research, it also helps convince potential investors that everything has been well thought through and there is little risk of the bsuiness failing
- it can show banks that if the business need a loan that the business will make enough profit in order to pay back the sum of money.
