BUSINESS FINANCE

What is business finance?

Business finance is the money required by a business to start up, operate, and grow.

Why do entrepreneurs and SMEs need finance?

To cover start-up costs, working capital, expansion, and unexpected expenses.

What is start-up finance?

Money needed to set up a new business.

What is working capital?

Money used for day-to-day operations, such as paying wages and suppliers.

What are internal sources of finance?

Funds generated from within the business.

What is personal savings?

The entrepreneur’s own money invested into the business.

Advantage of personal savings?

No interest to pay and full control is retained.

Disadvantage of personal savings?

Limited amount and personal financial risk.

What is retained profit?

Profit kept in the business rather than paid to owners.

Advantage of retained profit?

Cheap source of finance and no loss of control.

Disadvantage of retained profit?

Only available if the business is already profitable.

What is sale of assets?

Selling unused or non-essential assets to raise finance.

Advantage of selling assets?

Quick source of cash with no repayment required.

Disadvantage of selling assets?

May reduce productive capacity.

What are external sources of finance?

Funds raised from outside the business.

What is a bank loan?

A fixed sum borrowed and repaid with interest over time.

Advantage of a bank loan?

Suitable for large investments and ownership is retained.

Disadvantage of a bank loan?

Interest must be paid and security may be required.

What is an overdraft?

Permission to spend more money than is in the business account.

Advantage of an overdraft?

Flexible and interest is only paid on the amount used.

Disadvantage of an overdraft?

High interest rates and can be withdrawn by the bank.

What is trade credit?

Buying goods now and paying suppliers at a later date.

Advantage of trade credit?

Improves cash flow and is interest-free.

Disadvantage of trade credit?

Damages supplier relationships if payments are late.

What is friends and family finance?

Money borrowed from personal contacts.

Advantage of friends and family finance?

Flexible repayment terms and low or no interest.

Disadvantage of friends and family finance?

Can cause personal conflicts if the business fails.

What is a business angel?

A wealthy individual who invests in start-ups in return for a share of ownership.

Advantage of business angels?

Provides expertise and large sums of finance.

Disadvantage of business angels?

Loss of control and profit sharing.

What is venture capital?

Investment from firms in exchange for equity.

Advantage of venture capital?

Large amounts of finance for rapid growth.

Disadvantage of venture capital?

Pressure for high returns and loss of control.

What is a government grant?

Finance provided by the government that does not need to be repaid.

Advantage of a government grant?

No repayment or interest.

Disadvantage of a government grant?

Strict criteria and lengthy application process.

What is crowdfunding?

Raising small amounts of money from many people online.

Advantage of crowdfunding?

Raises finance and tests market demand.

Disadvantage of crowdfunding?

Ideas can be copied and funding is not guaranteed.

What is short-term finance?

Finance used for less than one year.

Give examples of short-term finance.

Overdrafts, trade credit.

What is long-term finance?

Finance used for more than one year.

Give examples of long-term finance.

Bank loans, venture capital, retained profit.

Why must entrepreneurs evaluate finance sources carefully?

Each source affects risk, control, cost, and cash flow differently.

Why might internal finance be preferred?

It is cheaper and avoids loss of control.

Why might external finance be necessary?

Internal funds may be insufficient for growth.

Why are bank loans risky for SMEs?

Fixed repayments increase financial pressure.

When is equity finance suitable?

When rapid growth is planned and expertise is needed.

Why might grants be ideal but difficult to obtain?

They are free but highly competitive.

What factors influence the choice of finance?

Cost, risk, control, amount needed, and time period.

What is the biggest disadvantage of equity finance?

Loss of ownership and control.

What is the biggest disadvantage of debt finance?

Interest and repayment obligations.