Ways Of Raising Finance Flashcards
What are the ways of raising finance?
Loan
Overdraft
Trade Credit
Retained profit
Sale of assets
Owner’s capital
New partner
Share issue
Crowdfunding
What is a Loan?
-A loan is issued by a bank*.
-The bank may require some security.
-The loan will have interest which will have to be paid back to the bank on top of the amount borrowed.
-Most business loans are for 10 years.
-The fixed payments each month helps the business to budget and plan (as they know their costs).
What are the PROS and CONS of Loans?
Advantages include:
-A medium to long-term business loan can help with all the costs of setting up a business.
-The longer the term of the loan, the lower the monthly interest payments may be, as the business will be spreading the cost over a longer period of time.
Disadvantages include:
-The amount of interest a business must pay on a loan will depend on the individual circumstances, including how much they want to borrow and over what period of time.
-Each month the business will have to pay back some of the loan and some interest too, they will have to do this even if they have are making a loss.
What is an Overdraft?
-Some months a business may need extra cash to tide it over until a better month. A loan is over many years so is not suitable.
-An overdraft may be organised by the bank which is short-term finance
Once it’s arranged (say £500) on an account a business can dip into it or pay it back as they see fit.
What are the PROS and CONS of Overdrafts?
Advantages include:
-Overdrafts are extremely flexible and can even be used for a single day if the business has a temporary cash-flow problem.
-Interest is only paid on the amount of the overdraft being used rather than the maximum level allowed.
-Security is not usually required.
Disadvantages include:
-The interest rate charged is usually higher than for a loan.
-Banks can demand immediate repayment (although this is rare).
-Bank may refuse to give an overdraft until the business is established.
What is Trade Credit?
-When one business trades with another they will sometimes need to buy goods with trade credit.
-The seller gives the buyer 30, 60, or 90 days to pay.
-The buyer then has time to sell the goods in their own shop before they have to pay for them.
-The wholesaler may give the buyer a discount when they use cash instead.
What are the PROS and CONS of Trade Credit?
Advantages include:
-The business will never run out of products to sell.
-The business can sell the products first THEN pay the supplier so they won’t have to raise finance for the goods.
Disadvantages include:
-The supplier may charge a higher cost for the products because of the credit arrangement
-If this is the first year that the business has asked for trade credit the supplier may say no.
What are Retained Profits?
-After a year or more of trading a business may have some profits that they are able to re-invest back into the business to help it grow.
-A well run business should continually re-invest in new staff, equipment, stock, premises or vehicles etc.
-They may even invest in designing new products.
What are the Advantages and Disadvantages of Retained Profits?
Advantages include:
-Unlike a loan there is no interest to pay so this makes it the cheapest method of finance available to a business (over 1 year old).
-Access to the funds can be quick and easy as they are already in the owner’s or company’s bank account.
Disadvantages include:
-If the retained profits are spent then they cannot be used for any other purpose e.g. to remain in the bank in case of emergencies.
-Not applicable in the first year of trading as the business has not made any profits to “retain”.
What are Sales of Assets?
Sales of assets means that a business has decided to sell…
-Machinery
-Vehicles
-Equipment
-Furniture
-Premises
-Land
…That it no longer needs.
What are the PROS and CONS of Sale of Assets?
Advantages include:
-This is a good way to raise cash quickly in the business.
-There is a good market for second hand business machinery, equipment and vehicles.
-There is no interest to pay on this type of finance, so cheaper than a loan.
Disadvantages include:
-Once the asset has been sold the business will no longer have the benefit of that asset, they will not be able to use the premises or machine they have sold.
-This will have an impact on their Statement of Financial Position so the business appears to own less, this may put off potential investors.
What is Owners Capital?
-The owner may have personal savings which they can use to help finance the business further.
-The owner may also have got a personal loan that they intend to use in the business.
-The owner may also use their own credit card to pay for some business items (this is quite normal in sole trader businesses).
What are the PROS and CONS of Owners Capital?
Advantages Include:
-Easy access to the money through the owner’s bank accounts.
-No complicated paperwork.
-No interest to pay on the money, so much cheaper than a loan.
Disadvantages include:
-Owner will not be able to spend it on something else like a car or holiday, this is called opportunity cost.
What is New Partner?
-A business partnership may decide to bring in a new partner, this is a person who is willing to invest their own money into the business .
-Partnership businesses are usually (but not always) a group of experts, for example; vets, dentists, solicitors, accountants etc.
What are the PROS and CONS of a New Partner?
Advantages include:
-The new partner will have a share in the business equal to the amount of their investment.
-For example, if they put in 30% of the total finance then they will have a 30% share in the business
It is another person that the existing partners will have to share their profits with.
Disadvantages include:
-The new partner can bring finance into the business which will not need to be paid back for a very long time.
-The partner’s capital will not incur an interest charge.
-The partner may bring lots of new ideas to the business.
