Studied by 1 person
What is internal finance?
The funds used from within a business
What is owners capital?
When an entrepreneur uses their own money into a business
What are dis/adv of owners capital?
+ Do not have to repay (no interest)
+ Risk may be motivating
- Risking own savings
- May only be limited amounts
What is retained profit?
Profit kept within the business from profit after tax to help finance future activity
What are dis/adv of retained profit?
+ Do not have to repay (cash flow)
+ Does not dilute ownership
- Only option if there is profit
- Reduces the security blanket of keeping profits
What is sale of assets?
A method of raising short-term finance by disposing of a business asset in return for cash
What are dis/adv of sale of assets?
+ No interest or repayment
+ Immediate lump sum
- Loss of asset and future value
- May be expensive to lease asset back in long term
What is external finance?
Funds raised from investors
What are the sources of finance?
Friends and family
Banks
Peer-to-peer funding
Business angels
Crowd funding
Other business
What are friends and family as a source of finance?
Investment from people known to the entrepreneur
What are dis/adv of friends and family?
+ Repayment terms and conditions may be flexible
- Amount may be limited
- Put pressure on relationships
What are crowd funding as a source of finance?
Raising finance from a large number of people each investing different amounts
What are dis/adv of crowd funding?
+ Can reach wider audience of investors
- Product could be copied
What are peer-to-peer funding as a source of finance?
Individuals lend money to individuals who there is no prior relationship
What are dis/adv of sale of peer-to-peer funding?
+ More competitive fees
- Higher investment risk
What are business angels as a source of finance?
Wealthy individuals make investments into start-up businesses
What are dis/adv of business angels?
+ Business must demonstrate good knowledge to secure
- High risk as business is not established
What are banks as a source of finance?
Financial institutions that are licensed
What are dis/adv of banks?
+ Specialise in offering advice
- Time consuming paperwork
What are other businesses as a source of finance?
Businesses with healthy cash balances may look to invest in other businesses
What are dis/adv of other businesses?
+ Higher potential returns than with money in the bank
- Risk
What is a loan?
When lenders provide capital to a borrower and the borrower agrees to repay amount with interest
What are dis/adv of loans?
+Quick and easy to secure
+ Fixed interest rates allow firms to budget
- Interest must be paid regardless of performance
- Often more expensive
What is share capital?
Money raised from the sale of shares
What are dis/adv of share capital?
+ Only need to pay dividends if profit made
+ Possible to raise large amounts
- Loss of ownership
- Threat of hostile takeover
What is venture capital?
Investment from and established business/person in return for percentage equity
What are dis/adv of venture capital?
+ Expertise
+ Easier to attract other sources of finance
+ Provides the required capital for expansion
- Expert financial projections likely required so initially expensive
- Partial loss of ownership
What is an overdraft?
The facility to overspend on a current account up to an agreed sum
What are dis/adv of overdraft?
+ Only borrowed when required allowing flexibility
+ Improves cash flow
- Interest payment variable so difficult to budget
- May secure overdraft against assets
What is leasing?
A contract that allows the renting of assets from another party
What are dis/adv of leasing?
+ Do not have to pay high costs upfront
+ Lease company responsible for repairs
- Expensive in the long run
What is trade credit?
An arrangement by a supplier to provide goods and services on account
What are dis/adv of trade credit?
+ Helps cash flow as not immediate
- May lose out on discounts on immediate payments
What are grants?
Fixed amounts of capital provided to business by the government to fund specific projects
What are dis/adv of grants?
+ No repayment
- Conditions have to be met for a grant
- May have lengthy application process
- Number limited
What is limited liability?
An investors liability is limited to the total amount invested
What are dis/adv of limited liability?
+ Seen as likely to fail
- Can’t sell shares
What is unlimited liability?
The owners of a business are responsible for the total amount of debt of the business
What are dis/adv of unlimited liability?
+ Suppliers may feel more secure
+ Cheap to set up
- Investors may be put off
What is a business plan?
A document that describes how an entrepreneur proposes to set up a new business
What are dis/adv of a business plan?
+ Help secure external funds
+ Identifies problem areas
- Time-consuming
Use of a cash-flow forecast?
Identify shortfall
Identify corrective action
Secure finance
Give confidence for survival
Limitations of a cash-flow forecast?
Based on predictions
Market research may be flawed
Affected by external environment
Demand may be over or under
