Business Theme 2.1: Raising finance

Owner’s capital.

Money invested into the business by the owner(s). Commonly used in sole traders / partnerships during start up of the business.

Advantages of owner’s capital.

No interest.
Owner keeps full control.

Disadvantages of owner’s capital.

Limited amount available (may not be enough).
Risk of losing personal savings.

Retained profit.

Profit kept in the business after considering all their previous costs.

Advantages of retained profit.

No interest.
No loss of control.

Disadvantages of retained profit.

Can take time to build up retained profit.
Shareholders may be less happy due to less dividends (if used for reinvesting instead).

Sale of assets.

Selling items (assets) the business owns to raise cash.

Advantages of sale of assets.

Quick source of cash (emergencies).
No debt / interest.

Disadvantages of sale of assets.

Reduces maximum capacity.
One off source of finance (can’t repeat this frequently).

Loans advantages + disadvantages.

Loans
Adv = owners keep control / no loss of shares, suitable for long term expansion.
Disadv = need to repay with interest, hard to obtain most times.

Overdrafts advantages + disadavantages.

Overdrafts
Adv = owners keep control / no loss of shares, good for short term cash flow.
Disadv = need to repay with interest.

Leasing advantages + disadvantages.

Leasing
Adv = owners keep control / no loss of shares.
Disadv = need to repay (sometimes with interest).

Trade credit advantages + disadvantages.

Trade credit
Adv = owners keep control / no loss of shares, good for short term cash flow.
Disadv = need to repay (with interest if late to repayments).

Grants advantages + disadvantages.

Grants
Adv = owners keep control / no loss of shares.
Disadv = hard to obtain / may not get enough.

Peer to peer advantages + disadvantages.

Peer to peer
Adv = owners keep control / no loss of shares.
Disadv = need to repay (sometimes with interest).

Family / friends loans advantages + disadvantages.

Family / friends
Adv = owners keep control / no loss of shares, good for short term cash flow.
Disadv = need to repay (very rarely with interest), very limited amount.

Share capital advantages + disadvantages.

Share capital
Adv = no repayment, good for long term expansion.
Disadv = loss of control.

Venture capital advantages + disadvantages.

Venture capital
Adv = no repayment, good for long term expansion, may be able to receive advice and contacts.
Disadv = loss of control, hard to obtain.

Business angels advantages + disadvantages.

Business angel
Adv = no repayment, good for long term expansion, may be able to receive advice and contacts.
Disadv = loss of control, hard to obtain.

Other businesses advantages + disadvantages.

Other businesses
Adv = good for long term expansion, may be able to receive advice and contacts.
Disadv = loss of control.

Crowdfunding advantages + disadvantages.

Crowdfunding
Adv = no repayment, creates publicity (acts as promotion for your business).
Disadv = limited (may not get enough).

Liability definition.

The extent to which owners are legally responsible for the debts of the business.

Unlimited liability.

No legal separation between owner(s) and business; if business cant pay debts, owner(s) may have to use personal assets.

Advantages of unlimited liability.

Have complete full control over the business.
Easier to set up a business with unlimited liability.

Disadvantages of unlimited liability.

Personal assets at risk.
Harder to attract investors.
Higher personal risk (discourages owners to make investments).

Limited liability.

Owners only lose the amount invested in the business.

Advantages of limited liability.

Personal assets protected.
Lower personal risk (encourages entrepreneurship).
Easier to raise finance from investors.
Greater credibility (more trusted by suppliers / banks).

Disadvantages of limited liability.

More legal formalities (accounts/public records are required).

Methods of finance for unlimited liability.

Owner’s capital, family / friends, bank loans, overdrafts, trade credit.
Smaller scale finance, and no need to worry about selling shares or repaying massive debts (which carry large risk).

Methods of finance for limited liability.

Share capital, venture capital, business angels, bank loans, leasing, trade credit, overdraft.
Investors protected by limited liability, so it is easier for them to raise large amounts of finance and take risks.

2.1.4

Planning

a) Relevance of a business plan in obtaining finance

b) Interpretation of a simple cash-flow forecast and

calculations based on changes in the cash-flow variables

c) Use and limitations of a cash-flow forecast

2.1.4

Planning

a) Relevance of a business plan in obtaining finance

b) Interpretation of a simple cash-flow forecast and

calculations based on changes in the cash-flow variables

c) Use and limitations of a cash-flow forecast