Topic 2.1 Raising finance Flashcards
Mrs Hudson
What is internal finance?
- Money from within the business
Sources of internal finance
- Personal savings
- Retained profits
- Sale of assets
- Owners capital
Reasons why businesses need to raise finance
- To buy supplys/technology
- To expand and grow
- To break even
- To pay bills/debts
Benefits of internal finance
- No money to pay back with intrest
- money is easily available
- Doesn’t Involve third parties who may want to influence decision making
Drawbacks of internal finance
- May charge intrest on finance`
- Once the moment has been used it is gone
- The amount of money may not be sufficient
Retained profits
- Involves re-investing their profits into the business
Benefits of Retained profits
- Doesn’t cost the business anything to obtain the finance
Drawbacks of Retained profits
- May not be a sufficient amount of finance
- Newer businesses won’t have much
Sale of assets
- Selling items that the business owns eg. machinery, land
Benefits of the Sale of assets
- Doesn’t cost the bussiness anything to obtain the finance
Drawbacks of the Sale of assets
- May take a while for the assets to sell
- No longer have access to the assets
What is external finance?
- Finance that is sourced from outside the business
Advantages of External finance
- Can speed up expansion
- Supports uneven cash flow
Disadvantages of External finance
- Higher intrest rates
- Decreased control
Family and friends
- When family and friends give or loan you money
Advantages of family and friends
- You stay in control of your business
Disadvantages of family and friends
- Could cause disputes
- May have to pay therm intrest
Bank loans
When a bank provides you with. larger sum of money
Advantages of bank loans
- Still have full control over your business
- Offers short and long term finance
Disadvantages of bank loans
- Usually requires a business plan
- Money needs to be paid back with intrest
- lengthy and strict criteria
Peer to peer funding
- Unsecured loans eg. Student loans, pay day loans
Advantages of Peer to peer funding
- Quicker and easier than a bank
- Remain in full control
Disadvantages of Peer to peer funding
- Limited availability - may not be available in certain locations or to certain borrowers
- Have to pay intrest
Angel investment
When other people use their personal savings to invest into your business
Advantages of Angel investment
- Brings in expertise/ knowledge
- Willing to take larger risks than banks eg. smaller businesses
Disadvantages of angel investment
- Want shares in your business
Crowdfunding (Donations)
A - Do not need to be paid back
D - usually only for social enterprises as they don’t make a profit
Crowd funding (Lenders)
Getting money back with intrest and the satisfaction of helping a small business
Crowdfunding (Investment)
In exchange for shares which may increase in value
Ordinary share capital
- Raised through selling shares
Advantages of Ordinary share capital
- Can raise large amounts of finance
- Lower risk of bankcruptcy
Disadvantages of Ordinary share capital
- lose control of your business
- They get a share of your profits
Venture capital
- Getting outside investment as the business is unable to raise money through the stock market
Advantages of Venture capital
- Helpful if a business struggles to raise finance through other methods
Disadvantages of Venture capital
- Can loose control of the business
- High expectations and pressure
Overdraft
Allows the business to seemed money that it doesn’t have in its account
Advantages of an Overdraft
- Allows the business to pay bills and wages even if they dont have sufficient cash
- Quick and easy
Disadvantages of an Overdraft
- Have to pay the money back with intrest
- No repayment plan so easy to fall into debt
Leasing
When one business rents and asset types another one in return for regular payments
Advantages of leasing
- No long term commitments
- Lower monthly payments
Disadvantages of leasing
- More expensive in the long run than just buying the asset
- More complicated
Trade credit
An agreement made with suppliers that’s allows businesses to purchase raw materials but pay for them at a later date eg. 30-90 days after
Advantages of trade credit
- Usually intrest free
- Improves cash flows
Disadvantages of trade credit
- Risk of late payment fees
- Expensive if payment date is missed
Government grants
A sum of money that is given to your business from the government
Advantages of Government grants
- ## Not expected to be repaid
Disadvantages of Government grants
- Must meet specific criteria
- Only given a percentage of the cost of your project
Unlimited liability
- Fully responsible for the debts of the business
- Can loose their personal assets
Limited liability
- Can only loose the original amount they put into the business
Advantages of a cash flow forecast
- Identify when the business may go through periods of cash shortfalls or cash supluses
- Help aid planning so they can avoid costly mistakes
Disadvantages of a cash flow forecast
- Based on estimates
- ## Time consuming and require highly skilled workers to create them
Business plans and obtaining finance
- Business plan will reduce the risk associated with starting up a business
- Businesses have to think through everything
- Shows investors that they have done their research
- Helps select the most appropriate source of finance
