2.1- Raising Finance

Question 1

What is the method of finance?

Answer 1

This is the use of a finance, or what use it would be suitable for (e.g loan to buy computer equipment for the business).

Question 2

What is equity?

Answer 2

The amount of money that could be returned to a company’s shareholders if all it’s assets were liquidated and debts paid off.

Question 3

What are sources of finance?

Answer 3

1. Family and friends.
2. Banks.
3. Peer to peer funding.
4. Business angels.
5. Crowd funding.
6. Other businesses.
7. Retained profits
8. Sale of assets

Question 4

What businesses will use family and friends to raise finance?

Answer 4

• Private limited companies (PLC).
• Sole trader or partnership.

Question 5

What are 2 benefits about using family and friends to raise finance?

Answer 5

• Loans will probably be offered without the need for security and at lower interest rates.
• Unlikely to need a business plan.

Question 6

What are 2 negatives to using friends and family to raise finance?

Answer 6

• It may cause tension and problems if the finance is not repaid to the business does not flourish.
• They may also demand their money back at short notice.

Question 7

What types of businesses will use banks as a source of finance?

Answer 7

• Banks may lend a loan to a business to start up or when they want to expand.
• Banks may also provide an overdraft if a business is having cash flow problems.

Question 8

What are 2 positives to a business using banks as a source of finance?

Answer 8

• Banks won’t ask for a % of the ownership.
• Banks won’t interfere with the business (no control).

Question 9

What are 2 negatives to a business using banks as a source of finance?

Answer 9

• Can be expensive and interest must be paid back.
• Owner may have to use their own asset as security (e.g house).

Question 10

What is peer to peer funding?

Answer 10

Lending marketplaces such as funding circle have gained the trust of consumers by offering lower rates than banks to business owners when borrowing money.

Question 11

What are 2 positives to peer to peer funding?

Answer 11

• A business can get access to funding within a week once approved.
• Can apply online.

Question 12

What are 2 negatives of peer to peer funding?

Answer 12

• Peer to peer funding loans are classified as private business loans.
• If there are not enough individuals interested or willing to invest in your loan, you may not be able to get the entire amount.

Question 13

What are business angels?

Answer 13

• They offer to lend their personal disposable finance.
• In return they would take shares in the business.
• Angels normally seek to also provide their knowledge to help the business.

Question 14

What are 2 positives of using business angels as a source of finance?

Answer 14

• Owner gets access to the investors knowledge and contacts.
• Owner will have no interest on the money lent.

Question 15

What are 2 negatives to using business angels as a source of finance?

Answer 15

• Not suitable for investments below £10,000 or more than £500,000.
• Owner needs to give up a share of the business.

Question 16

What is crowd funding?

Answer 16

Large number of people fund a project over the internet making small investments each, 3 ways to fund; donate, lend, invest.

Question 17

What are 2 positives to crowd funding?

Answer 17

• Good for small business owners (alternative to loans).
• Business can generate funds and also promote the business at the same time.

Question 18

What is a negative to crowd funding as a source of finance?

Answer 18

• Business will need to show case their idea to investors and may need to put together a video and other promotional material to attract investors.

Question 19

What are the 7 methods of finance?

Answer 19

1. Loans
2. Share capital
3. Venture capital
4. Overdrafts
5. Leasing
6. Trade credit
7. Grants

Question 20

What is the definition of finance?

Answer 20

Finance means management of the investment needed to; open, run and grow a business.

Question 21

What is the definition of internal finance?

Answer 21

Investment that comes from within a business.

Question 22

What are the 5 reasons for raising finance?

Answer 22

• To pay debts (consolidation loan)
• Help a business over a slow period (overdraft)
• To expand (long term finance, loan)
• To start up a business (business plan loan or investment from friends/family).
• To buy stock (trade credit from a supplier).

Question 23

What is owners capital?

Answer 23

• Shows the stake the owner has in the business.
• This represents the net assets of the company, if all the debts of the business were paid off how much would be owed to the owner.
• Sole traders and partnerships would use owners capital to expand and grow.

Question 24

What are retained profits?

Answer 24

• After a year or more of trading a business may have some profits that they are able to re invest into the business to help it grow.
• The advantage of retained profits is there is no interest to pay.

Question 25

What are sale of assets?

Answer 25

• A business can raise finance by selling items that they already own (assets).
• However, the lack of assets will be unattractive for investors.
• A way to get quick cash.
• Can improve efficiency.

Question 26

What is limited liability?

Answer 26

Means that a business owner is only liable for their original investment should the business fall into debt, their personal possessions are not at risk.

Question 27

What is unlimited liability?

Answer 27

Means that if a business has debts the owner must pay even if this means selling their own possessions to find the money.

Question 28

What types of businesses have unlimited liability?

Answer 28

• Sole traders
• Partnerships
  The business and the owner are seen as one legal entity.

Question 29

What types of businesses have a limited liability?

Answer 29

• Private limited company (ltd)
• Public limited company (plc)
  The owner and the business have separate legal identities so can sue or be sued separately.

Question 30

What types of finance are suitable for an unlimited liability business?

Answer 30

• Business loans from a bank.
  + Private investors.
• Credit cards from a bank
• Trade credit from suppliers.
• Owners savings.

Question 31

What types of finance are suitable for a limited liability business?

Answer 31

• Retained profit from the business.
• Sale of assets from the business.
• Givernments grants.
• Venture capital as they may be borrowing larger amounts than unlimited liability businesses.

Question 32

What is a business plan?

Answer 32

A document which sets out the future plans for a business. It is how business owner will explain how they will turn their idea into a successful business.

Question 33

How can business plans help a business? (4 points)

Answer 33

• Can help set up a new business
• Can help a business raises finance
• Cannuelp a business to set objectives
• Can help outline how functions of the business will be organised