Business Paper 2 2.1 Raising finance

What is capital expenditure?

Spending money on fixed assets such as equipment, buildings and vehicles

What is revenue expenditure?

Spending on raw materials and day to day expenses like wages and utilities

What are three examples of internal finance?

• Owners capital

• retained profit

• sale of assets

What is owners capital?

Personal savings are the owners money that is invested into the business usually when its just starting up

What is retained profit?

Retained profit is profit that has been generated from previous years earnings this is cheap for the business

What is sale of assets?

Selling the businesses assets that are no longer needed

Advantages of using internal finance?

• Usually doesn’t involve interest or charges

• No third party influence

• Quick and easy

Disadvantages of internal finance?

• May not be sufficient to meet the demands of the business

• High tax

What are the sources of external finance?

• Other businesses

• Bank loans

• Peer to peer funding

• Crowd funding

• Family and friends

• business angels

Advantages of a bank loan

• Can offer both short and long term finance

• Banks can give free advice

• Can be paid off monthly

Disadvantages of Bank loans?

• Usually require a business plan

• High interest

• Need security in the business

What is peer to peer funding?

Individuals with available savings pool it together with others in a peer investment scheme

Advantages of peer to peer funding?

• Usually no involvement with the business

• Easy access to loan

Disadvantages of peer to peer funding?

• Have to pay small levels of interest

• Interest goes to the person who’s money I actually is

What is a business angel?

An investor who helps a business start-up or expand

Advantages of business angels?

• More willing to take risks

• Guidance and advice

• Owners may be able to regain shares in the future

Disadvantages of business angels?

• Owners lose some control over the business

• Guidance may be wrong

What is crowdfunding?

A large number of investors online putting in a small amount of money in to help kickstart a business

Advantages of crowd funding?

• Provides free marketing for the company

• Doesn’t require any of your own money

Disadvantages of crowdfunding?

• Need a persuasive business plan

• Potential negative publicity

What are the methods of finance?

• Bank loans

• Share capital

• leasing

• trade credit

• venture capital

• overdraft

What is an overdraft?

When a bank account goes under 0 the individual can spend over the limit

Advantages of overdrafts?

• High flexibility

• Can aid cash flow quickly

Disadvantages of overdrafts?

• May be called in if the bank is concerned

• High interest rates

What is share capital?

Capital raised from the selling of shares from a company to share holders who are entitled to dividends

Advantages of share capital?

• Large amounts of capital can be raised

• No interests

Disadvantages of share capital?

• Costs for paying shareholders

• Losing control

What is venture capital?

Large amounts of funds provided by specialist investors into business so they can grow and expand

Advantages of venture capital?

• Large supply of funds

• expertise

• No interest of payments

Disadvantages of venture capital?

• Usually take a stake in the business

• Loss of control

What is leasing?

An asset such as a piece of machinery or a vehicle used by the business in turn for regular payments

Advantages of leasing?

• Business does not own the asset so does not have to pay for repairs

• Contract has a given time length

Disadvantages of leasing?

• Can be expensive in the long run

• Easier to just buy the asset

What is trade credit?

An agreement made with a supplier to buy now and pay later

Advantages of trade credit?

• Interest free

• Improves cash flow

Disadvantages of trade credit?

• If payments are not met then interest will rise substantially

What is unlimited liability?

• Fully responsible for debts owed by the business

• Owners are legally responsible for any unlawful acts

What is limited liability?

• Share holders can only lose the amount they put in

• Shareholders are not responsible for business debts

• Shareholders can not be responsible for any lawful acts

What types of ownership can use unlimited liability?

• Sole traders

• Partnerships

What types of ownership can use limited liability?

• Private limited companies

• Public limited companies

• Franchises