Starting a business

Question 1

Advantages of own capital

Answer 1

1. retain full control of your business
2. No application process
3. don’t have to worry about loan repayments

Question 2

Disadvantages of own capital

Answer 2

1. Risk of losing investment
2. Reduced diversification

Question 3

Personal loan advantages

Answer 3

1. Easier to qualify for
2. cash is available quickly
3. Retain control of your business

Question 4

Personal loan disadvantages

Answer 4

1. personal liability
2. Fixed monthly repayments
3. More expensive than a business loan

Question 5

venture capital/ private equity

Answer 5

financing provided by investors to startups and small businesses that have high growth potential. These investments are usually made in exchange for equity (ownership) in the company rather than repayment like a loan

Question 6

venture capital advantages

Answer 6

1. expertise
2. Connections and non financial resources (mentorship)
3. Reduced ongoing borrowing costs

Question 7

venture capital disadvantages

Answer 7

1. Sell a portion of your company
2. Less control
3. Expensive funding because future rewards are relinquished

Question 8

advantages of listed equity/shares

Answer 8

1. can offer stock options to attract and retain top talent
2. Large pool of investors = large capital
3. can raise additional capital without taking on debt

Question 9

disadvantages of listed equity/shares

Answer 9

1. strict reporting and disclosure requirements, increasing administrative workload
2. Loss of control - shareholders and boards influence business strategies
3. Public scrutiny from investors and the media

Question 10

Preference shares

Answer 10

type of equity financing where investors receive fixed dividends and have priority over common shareholders in receiving dividends and assets in case of liquidation. However, preference shareholders usually do not have voting rights, meaning they have limited control over company decisions.

Question 11

Advantages of preference shares

Answer 11

1. maintain control - allow businesses to raise capital without giving up voting rights.
2. Fixed dividend payments make it more attractive to certain investors while helping businesses plan their finances
3. No Mandatory Interest Payments - preference dividends can be skipped in tough times

Question 12

disadvantages of preference shares

Answer 12

1. Preferred dividends are usually higher than loan interest rates (expensive option)
2. Regular dividend payments can strain cash flow
3. Longer setup time than a loan

Question 13

Bank loan advantages

Answer 13

1. Retain full control
2. Predictable repayment structure
3. Bank loan interest rates are often lower than the cost of issuing equity

Question 14

Bank loan disadvantages

Answer 14

1. Can require assets as security putting the business at risk if it cannot repay the loan
2. Repayment Obligation regardless of performance
3. strict eligibility criteria

Question 15

development finance loan

Answer 15

short-term loan designed to fund property development, construction projects, or business expansion. It is commonly used by property developers, builders, and businesses looking to finance large-scale projects such as residential or commercial developments

Question 16

development finance loan advantages

Answer 16

1. Access to large capital
2. Flexible repayment - allow interest roll-up, meaning payments are deferred until the project is completed
3. Faster Approval Process

Question 17

development finance loan disadvantages

Answer 17

1. lending criteria - Lenders require detailed project plans, experience, and financial viability
2. higher interest rates
3. short term obligation - businesses must have a clear exit strategy for repayment

Question 18

listed debt

Answer 18

investors lend money to the company in exchange for periodic interest payments (coupons) and the return of principal at maturity.

Question 19

listed debt advantages

Answer 19

1. retain full control of business
2. large pool of investors
3. fixed repayment terms makes financial planning easier (also cheaper than equity)

Question 20

listed debt disadvantages

Answer 20

1. high Regulatory & Compliance Costs
2. high borrowing costs in the case of a weak credit rating
3. Some bonds come with covenants (contractual obligations) that may limit the company’s financial flexibility, such as restrictions on taking on additional debt

Question 21

4 owner considerations

Answer 21

1. ownership of the business
2. Control of the business
3. Cost of funding
4. Timing and process involved in attaining funding

Question 22

4 Cs (funder considerations)

Answer 22

1. Capacity
2. Collateral
3. Covenants
4. Character