2.1 RAISING FINANCE

Question 1

2.1.1 - Internal Finance
What is personal savings / owners capital?

Answer 1

Money saved by the entrepreneur

Question 2

2.1.1 - Internal Finance
What is the pros and cons of personal savings?

Answer 2

PROS:
- Easy access
-

Question 3

2.1.1 - Internal Finance
What is retained profit?

Answer 3

Is when a business makes a profit, it can leave some or all of this money in the business and reinvest it in order to expand.

Question 4

2.1.1 - Internal Finance
What is the pros and cons of retained profit?

Answer 4

PROS:
- Quick and convenient
- Easy access to the money
- No interest payments to make

CONS:
- Once the money is gone, it is not available for any future unforeseen problems the business might face

Question 5

2.1.1 - Internal Finance
What is sale of assets ?

Answer 5

• Selling products owned by the business.

Question 6

2.1.1 - Internal Finance
What is the pros and cons of sale of assets?

Answer 6

PROS:
- Can create space for more profitable uses
- Can be quick
- Raise money from unused equipment

CONS:
- Might not get the full market value of the assets or even be able to sell them at all
- Might need the assets in the future

Question 7

2.1.2 - External Finances
What is family and friends as a source of finance ?

Answer 7

Businesses can obtain a loan or be given money from family or friends that may not need to be paid back or are paid back with little or no interest charges.

Question 8

2.1.2 - External Finances
What are the pros and cons of family and friends?

Answer 8

PROS:
- Low interest
- Money may not need to be paid back

CONS:
- Money may be lost if the business fails
- Arguments may occur between family members

Question 9

2.1.2 - External Finances
What is banks as source of finance?

Answer 9

Is money borrowed from a bank by an individual or business. A bank loan is paid off with
interest, over an agreed period of time, often over several years.

Question 10

2.1.2 - External Finances
What is the pros and cons of bank loans?

Answer 10

PROS:
- Easy and quick to access
- Can get a significant amount of money at one time

CONS:
- Have to pay interest
- Difficult for a new business to access

Question 11

2.1.2 - External Finances
What is peer-to-peer funding as source of finance?

Answer 11

An alternative form of business finance which allows individuals or businesses to lend directly to other people or businesses, bypassing traditional banks.

Question 12

2.1.2 - External Finances
What is the pros and cons of peer-to-peer funding?

Answer 12

PROS:
- Convenient and faster
- Affordable way to secure a loan

CONS:
- Limited protections for investors
- Default on loans

Question 13

2.1.2 - External Finances
What is business angels?

Answer 13

Wealthy individuals who invest their own money in new businesses in exchange for a share of the company. They are often entrepreneurs or people with business experience

Question 14

2.1.2 - External Finances
What is the pros and cons of business angels ?

Answer 14

PROS:
- Providing mentorship, industry expertise
- Access to their network

CONS:
- Share of company ownership
- Possibility of conflicting ideas

Question 15

2.1.2 - External finances
What is crowd funding?

Answer 15

Is a way of raising money to finance projects and businesses

Question 16

2.1.2 - External Finances
What is the pros and cons of crowd funding?

Answer 16

PROS:
Access to large amount of investors
Fast way to raise finance

CONS:
A public request for investment risks your project being copied by competitors
If the targeted amount isn’t reached the money is returned to investors and the business gets nothing

Question 17

2.1.2 - External Finances
What are loans?

Answer 17

A bank loan is a long term source of finance. It is a fixed amount of money that is given to a business by the bank that has to be repaid over time with
interest usually in monthly instalments.

Question 18

2.1.2 - External Finances
What are the pros and cons of loans?

Answer 18

PROS:
Can be arranged quickly
Loan can be repaid over a long period of time

CONS:
interest has to be paid in addition to the loan amount

Question 19

2.1.2 - External Finances
What are share capital?

Answer 19

Share capital is money raised by shareholders through the sale of ordinary shares. Buying shares gives the buyer part ownership of the business and therefore certain rights, such as the right to vote on changes to the business. This can slow down decision-making processes

Question 20

2.1.2 - External Finances
What are the pros and cons of share capital?

Answer 20

PROS:
Share capital is a source of permanent capital – Shareholders cannot have a refund on their shares. Instead, if they want to sell their shares, they must find someone else to sell them to.

There are no dividends to be paid if the business has a poor year – Shareholders are not promised dividends every year, as dividends are only paid if the business has made sufficient money to pay all of its costs

CONS:
It dilutes control for the founders – The more shares that are issued, the more shareholders there are who own part of the business. This results in the founders having less control. In order to have a majority stake in the business, the founders must hold more than 50 per cent of the shares.
The business is vulnerable to takeover – As a business grows and sells more shares, it becomes vulnerable to the threat of a takeover. This is because the shares are sold publicly and if an individual or group buys enough shares, they can persuade other shareholders to vote for a new management team.

Question 21

2.1.2 - External Finances
What is venture capital?

Answer 21

Venture capital is money that investors provide to a company that is starting up or expanding. Venture capital is usually used when there is an element of risk with the business.

Question 22

2.1.2 - External Finances
What is the pros and cons of venture capital?

Answer 22

PROS:
Available for more risky investment

CONS:
Venture capitalists may want a share of the business meaning some control may be lost
A larger return may be required due to the high risk nature of the investment

Question 23

2.1.2 - External Finances
What is overdrafts?

Answer 23

A bank overdraft is a facility that will allow you to withdraw more money from your account than is available. A bank overdraft is a short term source of finance.

Question 24

2.1.2 - External Finances
What is the pros and cons of overdrafts?

Answer 24

PROS:
Can be arranged quickly

CONS:
Expensive as a high rate of daily interest is charged
Usually only available for small sums of money

Question 25

2.1.2 - External Finances What is leasing?

Answer 25

Leasing is a way of renting an asset that the business requires, such as a coffee machine. Monthly payments are made and the leasing company is responsible for the provision and upkeep of the leased item.

Question 26

2.1.2 - External Finances What are the pros and cons of leasing?

Answer 26

PROS: Large amounts of money are not required up front to lease machinery The leasing company are responsible for repairs and maintenance CONS: Over time it can be a more expensive way to obtain assets Assets are never owned by the business

Question 27

2.1.2 - External Finances What is trade credit?

Answer 27

Trade credit must be agreed with a supplier and forms a credit agreement with them.

Question 28

2.1.2 - External Finances What is the pros and cons of trade credit?

Answer 28

PROS: This source of finance allows a business to obtain raw materials and stock but pay for them at a later date. Improved Cash Flow: Trade credit allows businesses to delay payments, preserving working capital and improving cash flow management. CONS interest costs reduced negotiating power potential strains on supplier relationships.

Question 29

2.1.2 - External Finances What are grants?

Answer 29

A grant is a fixed amount of money usually awarded by the government, EU (European Union) or charitable organisations. Grants are given to a business on the condition that they meet certain criteria such as providing jobs in areas of high unemployment.

Question 30

2.1.2 - External Finances What are the pros and cons of grants?

Answer 30

PROS: Does not need to be paid back CONS: Business needs to meet certain criteria It is time-consuming to apply for grants and to complete the paperwork

Question 31

2.1.3 LIABILITY What is limited liability?

Answer 31

Where a business owner is only liable for their original investment should be the business fall into debt the business and the owner have seperate legal identities PLC + LTD

Question 32

2.1.3 LIABILITY What is unlimited liability?

Answer 32

if a business has debts the owner must pay even if this means selling their own possseions to find money sole trader + partnerships

Question 33

2.1.3 LIABILITY What finance would unlimited businesses use?

Answer 33

business loan private investors owners savings crowd funding

Question 34

2.1.3 LIABILITY What finance would a limited liability business use?

Answer 34

retained profit sales of assests trade credit government grants

Question 35

2.1.4 PLANNING What is business planning?

Answer 35

a business plan is a look into the future of the business: - it is not a look back at how things have been for the business - it would not include a bank statement as this is a look back at transactions

Question 36

2.1.4 PLANNING Why does a business write a plan?

Answer 36

to persuade lenders that the business will make enough profit to be able to pay back interest and loan capital on any finace taken out attract potential investors to the business to give the owners some direction - once a plan is written down it is more likely to be followed to set target ( SMART ) and objectives that can be followed to identify early on any problem areas that the business might face to monitor their effectiveness - if they knew what they were aiming for at the end of the year they could see if they have achieved it

Question 37

2.1.4 PLANNING Who can help you write a business plan?

Answer 37

Banks The Prince Trust

Question 38

2.1.4 PLANNING What are the contents of a business plan?

Answer 38

executive summary - outlining its purpose and the opportunity business ideas and opportunity - idea and concept so that all stakeholders can uderstand the owners intention aims and objectives - should be SMART = measure their success against these targets market research - into the target market, the market and other competitors financial forecast - costs, revenue, profit, and cash flow source of finance - a plan how the business will be financed and how any borrowings will be repaid premises and equipment - the location of the business, how will this be financed and other equipments the business will need personnel - outlining the personnel in the business, their areas of responsibility, skills and qualification buying and production - details of how the product will be produced including details of suppliers

Question 39

2.1.4 PLANNING What is cash flow?

Answer 39

cash flow is the movement of cash into and out of a business over a period of time cash flow is a forecast document showing expected timings of cash in and cash out

Question 40

2.1.4 PLANNING What is the use of cash flow forecast?

Answer 40

a business will prepare a CFF to help control and monitor cash in and out of a business at years end the business can make comparisons between the predicted inflows and outflows and what actually happened an important part of the financial planning process which may support an application for funding shows the business owner where likely cash surplus

Question 41

2.1.4 PLANNING What cause cash flow problems?

Answer 41

CREDIT SALES: - long payment sales - poor credit OVERTRADING: - additional overhead and day to day expenses - increases capital expenditure INTERNAL MANAGEMENT: - stock control - relationship with suppliers - poor or inaccurate planning - seasonality - inexpected events

Question 42

2.1.4 PLANNING How can a business improve cash flow?

Answer 42

reduce cash outflows e.g rent? - move , cheaper suppliers, reduce hrs increase cash inflows e.g cheaper advertising , extend target audience

Question 43

2.1.4 PLANNING What is a limitation of cash flow forecast?

Answer 43

Bias - a business may over inflate the inflows to make the business look better on paper to attract finance or impress a supplier predicition - an events that cannot be seen updates - mat need regular updating or the data becomes inaccurate mistakes - a tricky document for an inexperienced entrepreneur to produce time - the longer time the cashflow is based over the more likely it is to be inaccurate