Theme 2 - Raising finance

Question 2

Why do businesses require finance?

Answer 2

Businesses need finance to buy fixed costs (factories and machinery)
Day-day costs (such as wages ) so that the business can survive

Question 3

What is a source of finance?

Answer 3

A source of finance is a provider of finance

Question 4

What is a method of finance?

Answer 4

A method of finance is the way in which the provider gives finance

Question 5

What is short-term finance?

Answer 5

Short-term finance is for businesses to pay suppliers or cover temporary shortages of cash

Short-term finance is repaid within 1 year

Question 6

What is long-term finance?

Answer 6

Long-term finance is needed for long term investments

Long-term investment can take awhile for a business to benefit financially from investments so long term finance are due over a long period of time usually 3 years.

Question 7

What is internal finance?

Answer 7

Internal finance is where the money comes from within the business and can be raised by using the owners money, selling assets or putting profits back into the business

Question 8

What is owners capital?

Answer 8

Owners capital (sometimes known as owners equity) is money the owner/s invest into the business and is often from their personal savings

Sole traders and partnerships are likely to use this source of finance when they’re starting up or expanding

Usually relatively small businesses that don’t need huge sums of money or they may not be able to access other sources of finance.

Question 9

What are the pros and cons of owners capital?

Answer 9

Pros:
- Keep 100% of the business
- In case of personal savings there will be NO interest pay
- No delay in obtaining the finance

Cons:
- In the case of personal savings the amount raised depends on the owners personal savings
- If the business fails the owner stands to lose their investment
- Could put a strain on family and personal relationships

Question 10

What is retained profit ?

Answer 10

Retained profit is profit that can be retained and built up over the years for later investment
-can work in the long term and short term
-Not all businesses can use this source of finance especially new businesses who wont be making enough profit to be able to retain much

Question 11

What are the pros and cons of retained profit?

Answer 11

Pros:
- Doesnt need to be repaid / no interest payments
- Owners of the business control how the money is reinvested it is therefore a flexible form of finance
- Does not dilute the ownership of the company

Cons:
- In a smaller business it may take awhile to build up a significant amount of retained profit meaning opportunities could be missed
- In the case of limited companies shareholders may prefer dividends if the business is not achieving sufficiently high returns on investment

Question 12

What is sale of assets?

Answer 12

Sale of assets is when a business can raise finance by selling their assets ( factories or machinery) to generate capital

This source of finance is only appropriate for businesses with spare capital not suitable for very new businesses or very efficient businesses as they’re unlikely to have assets they don’t us

Question 13

What are the pros and cons of sale of assets?

Answer 13

Pros:
- Depending on the asset, a significant amount of money can be raised
- The finance raised does not need to be paid back so therefore is no interest pay
- Does not dilute the ownership of the company

Cons:
- Limited to businesses with spare/surplus assets
- May take a long time to sell the asset and may need to accept a lower price for a quicker sale
-Businesses lose the future of the asset

Question 14

What is external finance?

Answer 14

External finance is investment for the business that is obtained from bank, investors and lenders outside of the business

Question 15

What is a source of finance?

Answer 15

A source of finance is where the finance has come from

Question 16

What is family and friends as an external source of finance?

Answer 16

Family and friends as an external source of finance is when owners of a small/new business may ask family and friends to help them out financially

Ltds, soletraders and partnerships may ask family and friends for financial contribution

May be for interests of a share of profits or even an interest free loan amongst friends

Question 17

What are the pros and cons of Family and Friends as an external source of finance?

Answer 17

Pros:
- Loans from F&F will probably be offered without the need for security and at lower rates and over longer terms than traditional loaners
- They are unlikley to need a business plan- may not even need to write one
- May offer the money as a gift- little to no interest pay

Cons:
- May cause tension and problems with relationships if the finance is not repaid or the business does not flourish
- May demand money back short notice

Question 18

What are banks as an external source of finance?

Answer 18

Banks maylend a loan to a business to start up or when a business wants to grow and expand and may also provide a business with an overdraft to help when they have cash-flow problems

All high-street banks have business departments to deal with loans

Question 19

What are the pros and cons of a bank as an external source of finance?

Answer 19

Pros:
- Banks will lend a business without asking for a % of the ownership of the business
- Banks will allow the business owner to continue running the business their own way and not interfere so owner remains in control of the business

Cons:
- Bank loans can be expensive compared to other sources of finance and interest must be paid back on time
- May be hard for a new business owner to obtain a loan as they have no historical sales data to show the bank
- Owner may need to use their own assets as security for the loan ( a house

Question 20

What is peer-peer funding?

Answer 20

Peer-peer funding is when p2p companies operate online and they allow individuals to lend money to other individuals or businesses
Lenders say how much money they are willing to pay/lend and indicate what sort of interest rate they want
Borrowers say how much money they want to borrow and say why they need it and how long they will loan for

A lending company then assess how risky the borrower is and matches them with appropriate lender

Question 21

What are the pros and cons of p2p lending?

Answer 21

Pros:
- 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%

Cons:
- P2P loans are classified as private business loans so the money for the loan comes from several investors or small businesses
- If there is not enough individuals interested or willing to invest in your loan you may not be able to acquire the entire amount that the business needs

Question 22

What are business angels?

Answer 22

Business angels are wealthy individuals who invest money into new innovative businesses who they think have the potential to becoming successful

Often offer businesses advice and guidance and in return they ask for a share of the business

Angel investors often seek to have a return of their investment over a period of 3-8 years usually smaller loan amounts that venture capitalists

Question 23

What are the pros and cons of a business angel?

Answer 23

Pros:
- Angels are free to make investment decisions quickly
- Owner gets access to your investors sector knowledge and contacts
- Owner gets access to angels mentoring or management skills
- The owner will have no repayment or interests on the money lent

Cons:
- Not suitable for investments below £10,000 or more than £500,000
- Owners need to give up share of their business so lose full control

Question 24

What is crowd funding?

Answer 24

Crowd funding is where a large number of people fund a project over the internet making small investments each
Usually via the internet
Typically each person only contributes to small amount but collectively enough money is raised and this is a common source of finance for start up businesses

Question 25

What are the pros and cons of crowd funding?

Answer 25

Pros:
- Good alternatives to loans for small business owners
-Finance can be obtained withput paying upfront fees
-Businesses can generate funds and also promote funds at the same time
-Details posted publically so anyone can see and contribute to funding

Cons:
* Businesses need to provide a persuasive business plan to convince individuals to invest in their product as they will be competing with many other projects online
* The potential for negative publicity if the project is not successful in attracting enough crowdfunding capital

Question 26

What are other businesses as a source of finance?

Answer 26

Other businesses may wish to invest in startups if they have surplus profit and they get good return on their investment

Answer 27

A method of

Question 28

What is a method of finance?

Answer 28

A method of finance is the use/type of finance or what the finance will be used for

Question 29

What is a loan?

Answer 29

Loans are where a fixed amount of money is borrowed and paid back over a fixed period of time with interest
The amount paid back depends on the interest rate and length of time taken for the loan
Banks will lend to small businesses but may not lend when they first start up as there is no track record or history of them making money
Loans are quick to set up and security may be required for a loan such as a house in-case loan isn’t repaid
Loans are a good long-term source of finance for start up businesses paying for assets

Question 30

What are the pros and cons of a loan?

Answer 30

Pros:
-As the loan is fixed for a certain length of rime the business owner can plan ahead and knows exactly what the repayment will be and when they leave the bank account
-Banks will not ask for a % of the business ot get involved in the running of the business
- Straight forward process getting into highstreet banks apply for loans

Cons:
- A bank will charge interest on the loan
-Not very flexible businesses may incuyr a penalty if they settle loan early
- A bank will ask for security for coll
- Very expensive source of finance
- Not suitable for large amounts over a long period of time

Question 31

What is share capital?

Answer 31

Share capital is private and public companies who can be financed in the long term using ordinary share capital

Share capital is money raised by selling shares

This is an external long-term method of finance but would apply apply for businesses with plc after their name.

Question 32

What are the pros and cons of share capital?

Answer 32

Pros:
- 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 than getting into further debt

Cons:
- Potential investors may reuqire a great deal of background information before they buy the shares
- The more the shares are sold the more profit have to be divided up and paid out to investors and as dividends
- Can be expesnive and slow process to organise

Question 33

What is venture capital?

Answer 33

Venture capital is money that can be used as a method of finance for a bsuiness that is at huge risk but has potential to be successful could be a business that is just starting up or an existing business that is wanting to grow
Venture capitalists invest large sums of money into businesses in return for shares of the business and will typically VCs will invest at least £50,ooo in a small regional business and can rise into millions

Question 34

What are the pros and cons of venture capital?

Answer 34

Pros:
- Useful if business is looking to raise large amount of money in short space of time
-The business gets all the skills of venture capiyal business their network and links may incrwase revenue streams
-great for owners who have been refused a loan from the bank

Cons:
- Venture cpital firms typically want 20-30% stake in the business
- venture capital firms look for a strong business plan sound managemnt and a proven track record making it difficult for some start up businesses to attract investment

Question 35

What are overdrafts?

Answer 35

Overdrafts is where a bank lets a business have a negative amount of money in its bank account short term lending of small amount of money

once arranged a business can dip into it or pay it back as they fit

overdrafts are easy to arrange and flexible and

can borrow as little or as much as they need

Question 36

What are the pros and cons of overdrafts?

Answer 36

Pros:
- This would be ideal as a quick fix method to lift the business over a difficult month of trading
-An overdraft can be arranged on the phone or online with an instant decsion from bak
-The business will only pay interest on the amount of money
- As soon as business improves they can repay the overdraft

Cons:
-If the business goes over the amount the overdraft will be unauthorised and business will be charged heavily
- Very expensive source of finance- very high charges and interest rates
- Not suitavle for a large amounts over a lomg period of time

Question 37

What is leasing?

Answer 37

Leasing if a business doesnt have enough money to buy new assets they can lease assets instead
Leasing means paying in monthly sums over a set period of time
After leasing item is returned and they will never own the asset

Question 38

What are the pros and cons of leasing?

Answer 38

Pros:
- Lower monthly costs for a business than a loan
- Can be arranged withput any advanced fees being paid
- The leasing firm maintain the equipment on and will be up to date and wont be faulty

Cons:
- Leasing is often over a fixed term if the business changes its mind and wants to lease from a diff company contracts may be difficult to cut off
- Can be costly

Question 39

What is trade credit?

Answer 39

Trade credit is when a business buys a good or service and doesn’t have to pay straight away the business pays within an agreed time limit (30-90 days) of receiving the products
The buyer has time to sell the goods in their own shop before they have to pay for their own may give business a discount

Question 40

What are the pros and cons of trade credit?

Answer 40

Pros:
- Businesses can sell the goods before they hold the needs to be paid for so can make profit before costs need to be paid
-No interest has ro be paid on trade credit
- Businesses that pay reguarly on time can build relationships with their suppliers secure better deals
- Helps with cash flow

Cons:
- Not all stock is avaliable to buy using the trade credit method only applies to certain industries
- If the business does not pay in time they risk being refused further credit by supplier in the future
- Miss out on discounts

Question 41

What are grants?

Answer 41

A grant is a fixed sum of money given to a business often by the government in order to overcome problems of unemployment and are usually given fund specific projects in a business
Government grants do not usually have to be paid back and are businesses keep full control of business
A business needs to apply for their grant and supply lots of information

Question 42

What are the pros and cons of grants?

Answer 42

Pros:
- The business wont have to pay back the grant
- Unlike a loan there will be no interest to pau
- The business owner will get funds without any loss of control of the business
- Application process forces the business to think thoroughly about their decision

Cons:
-A business will have to find a grant that suits their specific project which can be difficult
- There’s lots of competition for grants
-The business may be exposed to match the funds they are awarded
- Grants usually awarded for proposed projects not others that have already started
- Application process can be complex and time consuming.
-

Question 43

What is unlimited liability?

Answer 43

The business owners and business are seen as one under the law
This is the case for sole traders and partnerships
This means business debts become personal debts of the owners and businesses can be forced to sell personal assets

Question 44

What is limited liability?

Answer 44

Owners arent personally responsible for the debts of the business
The share holders of both private and public companies have limited liability because a limited company has a seperate legal identity to its owners
The most the shareholders can lose if business fails is the money they invested

Question 45

How does limited liability affect sources and methods of finance?

Answer 45

-Businesses with limited liability usually find it easier to encourage people (angels) to invest in their business as people are more willing to invest knowing they wont lose any money
- Can raise lots of finance via share capital

Question 46

How does unlimited liability affect sources and methods of finance?

Answer 46

• Harder to encourage investors
• Sole traders and partnerships are likley to rely on internal sources of finance and external sources that dont require investor to become part owner
• Arent owned by share holders so cant rely on share capital however they can encourage people to invest for a share of the business but their unlimited liability may limit amount of money and number of people they can encourage
• Some cases it is easier to raise finance
  -If a business becomes limited investors may be wary that they are trying to protect themselves as they know the business is risky

Question 47

What is a business plan?

Answer 47

A business plan is a document that aligns what a business plans to achieve and how it plans to achieve it. Plans are important for new businesses but it is also important for established businesses as a way of monitoring performance and keeping on track

Question 48

What should a business plan include?

Answer 48

A good business plan should include:
- A business overview who is setting up the business? why? etc
- The businesses aims and objectives
- The marketing sales stratergy
- details of who will work in the business
Financial forcecasts ( break even, cash flow, budgets, profit etc)