2.3 Raising Finace Flashcards
Why do businesses raise finance?
-To pay debts
-To help a business over a slow trading period
-To expand
-To start-up a business
-To buy stock
Internal sources of finance are
Internal sources of finance are funds found inside the business.
Owners capital
-Also sometimes called owners equity, it shows the stake the owner has in the business
-The owner may have used savings or a redundancy pay out to start up the business, this is in theory still owed back to the owner, although they may never take it back out in the lifetime of the business
Retained profit
-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.
-A well run business should continually re-invest in new staff / equipment / stock/ premises / vehicles etc
-A business is in its first year of trading it will NOT have any retained profits – as it will not have made any to retain.
Sales of asset
Businesses can raise finance by selling items that they already own.
This could be:
-Machinery
-Land
-Premises
-Vehicles
The business that sells the asset will no longer have the benefit of that asset and it will not appear on the balance sheet of the company – meaning the business will look less attractive to investors
Sources of finance:
-family and friends
-banks
-peer-to-peer funding
-business angels
-crowd funding
-other businesses
Methods of finance:
-loans
-share capital
-venture capital
-overdrafts
-leasing
-trade credit
-grants
Peer loans
Peer to peer funding (or lending) is abbreviated to p2pl
-These are unsecured loans without going through a bank
-Student loans
-Payday loans
-Debt factoring
-Lease agreements
Angel investing
-Angel investing is equity finance.
-An Angel investor makes use of their personal disposable finance and makes their own decision about making the investment.
Crowd funding
A large number of people fund a project over the internet making small investments each, 3 ways to fund:
Donate: no money back, but rewards like tickets or a newsletter
Lend: get money back with interest and satisfaction of contributing to success of a small business
Invest: Invest in a business in exchange for equity or shares which may increase in value
Gearing ratio
Loan capital / capital employed x 100
-How dependant the business is on borrowed money
-The higher the gearing ratio the worse off the business is
Share capital
-In a public limited company they can raise more finance to expand by having an ordinary share issue
-This is an external long term method of finance
Advantages of owner capital
Don’t owe anyone money/debt
No interest rate
Don’t need a business plan to get it
Immediate availability
Disadvantages of owners capital
Could lose money
Limited funds
Advantages of retained profit
Don’t owe anyone money/debt
No interest rate
Don’t have to pay back
Immediate available to established businesses
