Flashcards in Raising Finance Deck (18):
Sources of finance
Ordinary share capital, venture capital, loan capital, bank overdrafts and personal sources.
Ordinary share capital
Money given to a company in return for share capital, giving them part ownership, which entitles them to a share of the profits. Owning 51% of shares guarantees overall control.
Advantages of ordinary share capital
-limited liability encourages shareholders to invest as it restricts the amount of money they could lose.
- new shareholder=more expertise/ideas
-doesn't need to be repaid
-dividend payments aren't necessary, if they can't be afforded.
Disadvantages of ordinary share capital
-new shareholders may not have same values as original owners
-shareholders will expect good dividends in profitable years, meaning more expensive payments.
-original owners may lose control
Loan capital (bank loan)
An agreed upon sum of money provided to a firm or an individual by a bank for a specific purpose. Money must be repaid with interest after an agreed period of time.
Advantages of bank loans
-size of loan and period of repayment can be organised to match the need a of business.
-interest rates are lower because of the security provided.
-interest rates and repayments are agreed in advance, making it easy to budget the schedule for repayments.
Disadvantages of bank loans
-difficult/ costly to repay the loan early
-start-up business are charged higher interest rates because they're unable to provide the guarantees a bank might like.
-size of loan limited by amount of collateral that can be provided, rather than amount of money that can be paid back by business.
When a bank allows an organisation to overspend it's current account at the bank up to an agreed limit and for a stated time period.
Advantages of bank overdrafts
-they are extremely flexible and useful for temporary cash flow problems
-interest only paid on the amount of overdraft being used.
-collateral isn't required
-useful for seasonal business.
Disadvantages of bank overdrafts
-Interest rate charged is higher than for a loan.
-banks can demand immediate repayment(rare)
Finance provided to small/medium-sized firms that seek growth, but are considered too risky to invest in by share buyers or other lenders.
Advantages of venture capital
-available to firms that are unable to get finance from other investors because of the risk involved.
-allow interest or dividends to be delayed.
-provide advice and guidance.
Disadvantages of venture capital
-want a significant share of the business in return.
-high interest payments or dividends
-original owner may lose independence as venture capitalist exerts too much influence.
Personal sources of finance
Selling private assets
Borrowing from family and friends
Advantages of personal savings
-incredibly cheap source of finance.
-enables owner to keep control.
Disadvantages of personal savings
-can run out quickly
-not enough funds to finance a new business.
Advantages of a mortage
-A second mortgage allows a homeowner to raise a substantial amount of money.
-lower interest rate.