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A-Level Business 📈 > 2.1.2 External Finance 🏦 > Flashcards

2.1.2 External Finance 🏦 Flashcards

(73 cards)

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1
Q

What are the 7 methods of finance ?

A

Loans

Trade credit

Venture capital

Share capital

Grants

Leasing

Overdraft

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2
Q

What are the positives and the negative of loans ?

A

Positives- long term

Have specific plans for businesses

Do not want a stake in your business

Advice

Negatives- intrest

  • may lead to bad credit score if unpaid

Hard to attain

Not guaranteed

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3
Q

What is shared capital and what are the positives and negative ?

A

Sell shares of business in return for capital

Positives - no interest

Negatives -dilute of ownership

Risk of hostile takeover

If a plc your performance is visible to competitors

More dividends to pay

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4
Q

What is venture capital and what are the pros and cons ?

A

You pitch your idea to other entrepreneurs and they offer you money for return for a Share of your business

Pros - get knowledge

Offers large amount of capital

Negatives - dilute ownership

Difficult to obtain

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5
Q

What are overdrafts and what are the positives and negatives ?

A

Your overdraw a small account form your account

Pros - flexible
Helps free up cash flow

Negatives - short term

High interest

Small amount only

Not enough to cover costs - lead to uncertainty

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6
Q

What is leasing ? Pros and cons

A

When you pay to borrow an asset.

Pros - no large sums of money needed for use

Maintenance cost responsibility of
owner

Assets remain property of the business

Cons - long periods of leasing are expensive

Loans cannot be secure

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7
Q

What is trade credit ? Positives and negatives ?

A

But now pay later

Positives - frees up cash flow

Still have access to suppliers - can still trade

No interest

Negatives - fail to pay- loss of good will and bad rep

Only short term

Lose best supplier

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8
Q

What are Grants ? Positives and negative ?

A

When the government or organisation give you money

Positives- does not have to be repaid

Negatives- only available to small business

Hard to obtain

Filling applications for grants are time consuming

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9
Q

What are the 6 sources of finance

A

Friendsa and family

Peer to peer funding

Business angels

Banks

crowd funding

Other businesses

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10
Q

What are the advantages and negatives of using family and friends as a source of finance

A

Interest may be low or Zero if gifted

May not want a stake

Not fixed in terms or conditions

Negatives - if fail to pay back may lose friendships or relations

Limited

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11
Q

What are the positives or negatives of a bank as a source ?

A

May offer advisory advice

No Interest In your business so don’t worry about ownership

Negatives- need business plan

Interest

Secure loans on assets - bay lifts

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12
Q

What is peer to peer funding as a source ?

A

People lend you money ( not related)

Positives- no previous relations needed between lender or borrower

Cheaper as all online transactions take place online - convenient

Can have financial cover

Negatives- loans are insecure no protection for lender if borrower defaults

Interest

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13
Q

What are business angels ? Positives and negatives ?

A

Individuals that may invest 10000 to 100000 pounds for exchange for a stake in the business

Positives - no interest

Expertise with experience

Negatives - hard to find angel with similar outlook of the businesses future - lead to disagreement

Have to share profit

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14
Q

What is crowd funding ? Positives or negatives ?

A

Lots of people invest small amounts of money into your business

Advantages- no interest

No relations needed

All online convenient

Negatives - if you don’t get amount by deadline you lose everything

Very competitive

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15
Q

What are other businesses and a source of finance ?

A

Joint ventures - expertise
low interest

Negative - may buy shares

Risk of hostile takeover
Dilute ownership

Take a while to start up - not for immediate aid

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16
Q

What is the sole trader?

A

Business that is owned and run by one person

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17
Q

What is a partnership?

A

It’s a business that is owned by two or more people

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18
Q

 what is personal savings?

A

Entrepreneur uses finance such as cash in bank accounts or less liquid at it such as stocks and shares to finance the market 

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19
Q

No What is the present cons of personal savings? 

A

Longterm source of finance

Internal finance and

new/start-up businesses 

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20
Q

What are the two cons of sources of finance? 

A

Likely to be limited

if business does not initially make profit using savings financial pressure

loss of well-being

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21
Q

What are the cons and pros of retain profit? 

A

No financial costs
no control/share up ⬆️ interest could debt finance

Cons- may create conflict with shareholders using retained profit will decrease 📉 dividends

Usually finite retained profit - may result to slow growth

No expertise added may lead to depths from banks and equity

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22
Q

What is retained profit?

A

When the business needs historical profits from previously to invest

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23
Q

What is the fixed assets?

A

Rise in cash via the sales of surplus of fixed assets

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24
Q

What are fixed assets normally a source of? 
What kind of finance is it?

And when is it used? 

A

Long-term finance
Internal finance
usually used in established businesses 

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25
What are the pros of sources of finance of selling fixed assets? 
debt  - no interest paid The equity - No control given up  providing you find a buyer, it’s a quick form of cash  Cons Only finite amount you can do this as you have few surplus assets most fix assets are needed for the business ? Risk - cannot find a buyer do not receive fair value for the fix assets likely it has depreciated 
26
What is a bank loan ?
When a business borrow us some money and pays it back with interest an agreed period of time 
27
What are the pros and cons of bank loans? 
No share in business needs to be given up - can keep control interest rates ⬇️ versus overdraft ⬇️cost down overall able to be bespoke to business needs repayment terms frequent repayment may improve credit - enabling you to get more sources of finance  No assets will increase therefore worth of the business will increase  - source of finance will go on your balance sheet 
28
What are the four cons of a bank loan? 💵 
Assets will be taken if you fail to repay - limited liability ? Flexibility must keep to the repayment terms Maybe it’s to pay worsen your credit score Increase in gearing ratio of the business as long-term debt finance 
29
How do we calculate interest?
Total repayment – borrowed amount/borrowed amount*100
30
What is crowd funding? 
Method of raising finance funds for project by small contributions by large number people usually via the Internet 🛜
31
What do businesses have to outline within crowd funding? 
Outline project and funding goal rewards and incentives to backers 
32
What are the pros of crowd funding ?
Built in marketing and exposure the account for the platform and when is created if crowdfunding is a go Access to Finance without taking the traditional root - good for early stage start seeking to validate ideas when traditional financial options are not available 
33
What is the cons of crowd funding? 
Go may not be reached - no go Ideas being shared on crowd funding platform- copied ? Often huge competition on cloud funding platforms 
34
What are business angels? 
Wealthy individuals who provide capital to start up an early stage businesses in exchange for equity 
35
What are the three things business angels offer? 
Offer mentoring industry connections expertise help the business grow 
36
What are the three pros of business angels? 
Essential for early stage of the business to accept capital - when other methods are in accessible Good for expertise midship industry connections are networking  More flexible versus venture capital 
37
What are the four kinds of business angels? 
Selling percent of this leads to loss of equity complicated - risk too dependent on business angel 😇 how much finance does the business angel 👼 have?
38
What are new share issues? 
When a limited company issue shares in exchange for payment
39
What was use share issues? 
long time finance external finance established businesses use it
40
What is share issues?
A form of equity finance 
41
What are the positives of new share issues?
No interest, not a loan 💸 - You have to keep up the payment no repayment public limited company - stock exchange opportunity to raise a huge amount of finance. Connect HR employee - insensitive profit sharing  It’s a good exit strategy 
42
 what is a venture capital?
Type of finance offered by VC to fund high risk cover reward firms exchange for a share business 
43
What is trade credit? 
When you buy materials from suppliers today , But pay later 
44
What kind of finance is trade credit?
Short term external used by new/start-up businesses 
45
What are the three pros of Trade credit?
simple to arrange a maintain if credit terms are cheap Cheap form of short-term finance cheaper than overdraft no control of a business is given up
46
What are the cons of trade credit?
Risk spoiling relationship with supplier if credit terms not met large fine if you pay late due to after credit terms 
47
What are grants? 
Financial award given by the council government or charity 
48
What are the three reasons why we have finance? 
External finance long-term and start up new business 
49
What are the two pros of grants?
non-repayable no control giving up 🆙 - maintain decision-making 
50
In what are the cons of sources of finance - grants 
Time-consuming process- What if u are rejected opportunity cost - the more type go rejected increases the grant request and increases - application process takes longer Grantes tied set conditions match funded 
51
 what are an incorporated and incorporated businesses?
Incorporated private Limited companies public companies because they have limited liability not responsible for the debts of the business Unincorporated- sole traders and partnerships they are responsible for all the debts of the business in cars they are seen as the same legal entities 
52
What is not a risk for incorporated businesses? 
Shareholders personal assets? 
53
What are the pros and cons of incorporated and unincorporated businesses?
Shareholder losses unlimited how much they actually invested into the business whereas with unincorporated the personal assets such as a house or car are at a risk
54
What is budgeting used to analyse? 
Actual figures, if it’s a favourable or adverse
55
What are the pros of budgeting? 
Gives them spending guidance - encourage spending discipline Help support a business plan if profit budget increase chance of obtaining finance
56
What are the cons of budgeting?
 Who sets the budget - measurement may set the budget but not have expertise in area for ambitious targets or demotivating Historic budgets are based on previous years encourages to use it or lose it mentality which is leads to waste  how frequently are budget Reviewed?- not often budget she lack management over estimate costs 
57
What are the three kinds of budgets? 
Profits revenue costs
58
When is a cost adverse or favourable? 
Adverse - higher than expected, it’s lower than expected - favourable 
59
What’s a business plan? 
A document explaining what the business intends to do 
60
What are some things in a business plan?
Operations HR finance name idea USP aims objectives
61
What are the pros of a business plan? 
Help understand finances - budget forecast are expected cost/revenue Increases chance of obtaining finance Closer  inspection - checks for gaps
62
What are the cons of business plans? 
Only a plan reality likely to be different -danger of becoming stuck on the plan ignoring external influences  Who did the plan? They have the experience? - dangers of inflating revenue and deflating costs Liquidity issues? 
63
What is a cash flow forecast helpful for?
Hope you predict when you have a liquidity problem 
64
 how do we calculate the closing balance?
Net Cash flow + opening balance 
65
Why are cash flow forecasts useful? 
Help to identify liquidiyy issues if there’s not enough cash if there’s too much cash they could be issue too much cash - 💸 opportunity cost could be doing something with it 
66
What could we be doing if you have too much cash in the business?
Put it in a high interest account accumulated overtime or use it to expand 
67
What can cash forecast be to anticipate and manage?
Cash flow issues and anticipate - sources of finance expand
68
Why does poor cash flow happen? 
Poor sales - new revenue , no cash flow  overtrading - if you have too much stock, do you have less cash - just in case which to just in time 🕰️  debtors and creditors - adapters 60 days creditors is 20 No cash flow forecasting - poor business management - anticipate seasonal fluctuations 
69
What are the four reasons why poor cash flow is an issue? 
Not enough cash for day 2 day expenses Lack of working capital CA – CL Cannot up pay workers wages - decreases motivation decreases productivity Indicates need for sources of finance - comes with a cost 💲 - debt internal finance Equity lose control Creditors - suppliers but have given you credit or reduced time you have to pay may it may make cash that issue worse or you lose- Goodwill 
70
What are the four solutions to Cash flow problems?  What are the pros and cons of them? 
Reqscheduling payments- Increase speed of receiving cash inflows - customers paying 30 days not 90 days may lose sales due to rescheduling increase cash flows - marketing campaign to increase sales or increase selling price - may decrease sales  decrease cash output - decrease D hold less stock decrease gross stock storage cost less sales revenue sources of finance overdraft - quick and easy to sort result unexpected expenditures High interest worse than a bank credit rating down
71
How do we calculate revenue at the breakeven point? 
BE output * sales price
72
What is the impact of break even output if revenue increases?  What is the impact on the margin of safety? 
People would assume it’s due to an increase in price and brand loyalty MOS - increase 
73
Why, why may revenue decrease? 

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