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2.1 - Raising Finance Flashcards

(80 cards)

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1
Q

Why do businesses need finance?

A

To get started, grow, and fund their ongoing activities.

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2
Q

What is capital expenditure?

A

Spending on fixed assets like buildings, vehicles, and equipment.

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3
Q

What is revenue expenditure?

A

Spending on raw materials and day-to-day costs like wages and utilities.

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4
Q

What is the difference between internal and external sources of finance?

A

Internal finance comes from within the business; external finance comes from outside sources.

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5
Q

What are the main sources of internal finance?

A

Owner’s capital, retained profit, and sale of assets.

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6
Q

What is owner’s capital?

A

Personal savings or lump sums (e.g. redundancy money) introduced by the owner.

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7
Q

When might an owner invest more capital?

A

As the business grows or during short-term cash flow problems.

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8
Q

What is retained profit?

A

Profit kept in the business from previous years and reinvested rather than given to shareholders.

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9
Q

What is a key advantage of retained profit as a source of finance?

A

It’s a cheap source—no interest or fees.

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10
Q

What will you miss out on by using retained profit?

A

Shareholders miss out on receiving it as dividends.

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11
Q

What does the sale of assets involve?

A

Selling unused assets like buildings or machinery to generate cash.

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12
Q

What is sale and leaseback?

A

Selling an asset (e.g. a building) and leasing it back to keep using it while receiving cash upfront.

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13
Q

Give an example of sale and leaseback in the real world.

A

In 2023, Sainsbury’s planned to sell retail property for £500m and lease it back from LXi Reit.

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14
Q

How can a business improve internal finance through working capital?

A

By extending supplier payment terms and encouraging quicker customer payments.

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15
Q

List 3 advantages of using internal finance.

A
  1. Often free (no interest or charges)
    1. Quick to arrange, minimal paperwork
    2. No third-party influence on decisions
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16
Q

List 2 disadvantages of using internal finance.

A
  1. High opportunity cost (e.g. no dividends for shareholders)
    1. Limited availability—once used, it’s gone
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17
Q

What is external finance?

A

A: Finance sourced from outside the business.

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18
Q

Name 6 key sources of external finance.

A

Family & friends, banks, peer-to-peer funding, business angels, crowdfunding, other businesses.

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19
Q

What is a key benefit of using family and friends as finance?

A

Cheap and flexible with possibly no strings attached.

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20
Q

What is a key risk of family and friends finance?

A

It can damage personal relationships if not repaid.

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21
Q

What types of finance do banks offer?

A

Overdrafts, loans, mortgages, and advice.

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22
Q

What is a disadvantage of bank loans?

A

Interest and fees, cautious lending to new businesses, and need for security or a business plan.

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23
Q

What is peer-to-peer funding?

A

Individuals pool money to lend to businesses via platforms like Funding Circle.

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24
Q

Give one benefit and one drawback of peer-to-peer funding.

A

Benefit: Fast access to funds.
Drawback: Fees and interest must still be paid.

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25
Who are business angels?
Individuals who invest in start-ups or expanding businesses (e.g. Dragons’ Den investors).
26
What’s a downside of business angel investment?
Angels may want influence and a share of profits.
27
What is crowdfunding?
Raising small investments from many people via online platforms (e.g. Kickstarter).
28
What is a key benefit of crowdfunding?
Builds a customer base and offers free marketing.
29
What is a key disadvantage of crowdfunding?
High competition, potential for public failure, and need for strong marketing.
30
How can other businesses be a source of finance?
Through joint ventures, share investments, or takeovers.
31
What is a risk of funding from other businesses?
Shared profits and loss of control over decisions.
32
Why have peer-to-peer, crowdfunding, and angel investing grown recently?
They help fill gaps left by stricter, more cautious bank lending.
33
What is a useful evaluative point about access to finance?
Limited finance can restrict business growth and ability to meet objectives.
34
What are 7 key methods of external finance?
Loans, share capital, venture capital, overdrafts, leasing, trade credit, grants.
35
What is a loan?
Borrowed money repaid over time with interest.
36
What is a debenture?
A long-term loan with fixed interest and no ownership rights.
37
One benefit and drawback of loans?
Benefit: Fixed repayments help budgeting. Drawback: Increases liabilities; may lose assets on default.
38
What is an overdraft?
A short-term finance allowing spending beyond account balance, with interest on overdrawn amount.
39
Advantage and disadvantage of overdrafts?
Advantage: Flexible and good for cash flow. Disadvantage: Can be withdrawn at any time.
40
What is share capital?
Funds raised by selling shares in a limited company.
41
What is a drawback of share capital?
Shareholders gain a vote and share of profits.
42
What is venture capital?
Investment in small/growing firms by specialist firms or investors.
43
Downside of venture capital?
Investor usually wants control and equity in return.
44
What is leasing?
Paying to use an asset without owning it (e.g. vehicles, IT).
45
Benefit and drawback of leasing?
Benefit: No maintenance responsibilities. Drawback: More expensive than owning long-term.
46
What is trade credit?
Buying goods now and paying later (typically 30-90 days).
47
Benefit and drawback of trade credit?
Benefit: Usually interest-free. Drawback: No early payment discounts.
48
What is a grant?
Money given by government or trusts, not to be repaid.
49
What’s a limitation of grants?
Must be used for a specific purpose and may have strict conditions.
50
What are the 5 most common forms of business ownership?
Sole traders, partnerships, private limited companies, public limited companies, and franchises.
51
What is unlimited liability?
The owner is personally responsible for all business debts and legal issues — there’s no separation between personal and business assets.
52
Give an example of unlimited liability.
A sole trader may have to sell their home to repay business debts.
53
What is limited liability?
Shareholders only lose the money they’ve invested in the business — personal assets are protected.
54
Give an example of limited liability.
In 2018, Carillion shareholders lost their investments when the company collapsed but didn’t have to pay business debts from personal funds.
55
Which business types have unlimited liability?
Sole traders and partnerships.
56
Which business types have limited liability?
Private limited companies (Ltd) and public limited companies (Plc).
57
What are some finance methods suitable for limited liability businesses?
Share capital, venture capital, debentures, mortgages, leasing, long-term bank loans.
58
What are some finance methods suitable for unlimited liability businesses?
Personal savings, family and friends, bank overdrafts, trade credit, short-term loans.
59
Why does the reason finance is needed affect the method chosen?
Capital expenditure (e.g. equipment) needs long-term finance; revenue expenditure (e.g. raw materials) suits short-term finance.
60
Why does how long and how quickly the finance is needed matter?
Short-term needs = overdrafts or trade credit; long-term needs = shares, mortgages, or debentures.
61
How does who will lend affect finance choice?
Riskier or new businesses may rely on angels, crowdfunding, or pay more to borrow.
62
How does the cost and ease of access affect finance choice?
High-interest methods (like loans) are costly when interest rates rise; grants and shares are cheaper but harder to access.
63
How does legal status affect finance options?
Limited companies attract more lenders/investors. Unlimited liability businesses may struggle due to fewer assets or trading history.
64
What is the purpose of a business plan?
It provides forecasts for sales, costs, and cash flow to reduce the risk associated with starting a new business.
65
How does a business plan help potential lenders and investors?
It shows that the business has done its research and helps lenders/investors make informed decisions about providing a loan.
66
How does a business plan help the business owner?
It forces the owner to think about all aspects of the business and reduces the risk of failure by being well-informed.
67
Why is producing a business plan important for selecting the most appropriate source of finance?
It allows the business to analyze its potential problems and chances of success before selecting the right type of finance.
68
What do most high street banks provide to help business owners with their business plan?
A detailed template for the business owner to complete when applying for finance.
69
What is a cash flow forecast?
A prediction of anticipated cash inflows and outflows, typically over six to twelve months.
70
What does a detailed business plan include, regarding cash flow?
A cash flow forecast that helps identify the financial needs of the business.
71
How is the net cash flow calculated?
By subtracting total outflows from total inflows.
72
How is the opening balance calculated?
It is the previous month’s closing balance carried forward.
73
How is the closing balance calculated?
By adding the net cash flow to the opening balance.
74
What are examiner tips for cash flow forecast calculations?
Work through each month individually and double-check calculations to avoid mistakes affecting the entire forecast.
75
What are some uses of cash flow forecasts?
They support loan applications, help identify cash shortfalls or surpluses, and assist in planning to avoid costly mistakes.
76
What are some limitations of cash flow forecasts?
Forecasts are based on estimates, which may differ significantly from actual inflows and outflows. They also may not reflect external factors impacting the business.
77
Why is it challenging for new entrepreneurs to create accurate cash flow forecasts?
They lack experience and often rely on free advice or research, which may not always be enough to create accurate forecasts.
78
What happens when a cash flow forecast is poorly constructed?
It can hinder business progress and undermine the business plan as a whole.
79
What is a useful evaluative point about access to finance?
Limited finance can restrict business growth and ability to meet objectives.
80

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