Theme 2 - section 6 (raising finance) Flashcards
(37 cards)
What is short term finance?
Finance usually repaid within one year.
What is long term finance?
Finance usually repaid in over 3 years or more.
When choosing a source of finance a business must consider ….
- Amount of money required
- Level of risk involved
- Cost of the finance
What are internal sources of finance?
- Owners capital
- Selling assets
- Retained profit
What is owners capital?
- Money the owner invests from their personal savings.
- Easy to access, and does not need paying back.
- Can be limited depending on owners wealth.
What is selling assets?
- Business selling their assets to generate capital.
- Not suitable for new or efficient businesses.
- There are no interest payments, so it is a cheap source of finance.
- Business no longer owns the assets once sold, and it can take a long time to get cash.
What is retained profit?
- Profit built up over the years, saved for later investment.
- New businesses won’t be making enough profit straight away to do this.
- No interest payment.
- Shareholders may reject this method as they want this profit as dividends.
What are external sources of finance?
- Family and friends
- Banks
- Peer to peer lenders
- Business angels
- Crowd funding
- Other businesses
What is family and friends as a source of finance?
- Flexible repayment with little or no interest.
- Could strain relationships.
What do banks offer as a source of finance?
- Offer loans, overdrafts, and mortgages.
- Recognised financial institutions.
- Strict lending criteria, can be hard for start-ups to be approved by the bank.
What is peer to peer lending?
- Operate online.
- Lower interest rates than a bank loan.
- A lender lends money to a borrower.
What are business angels?
- Offer guidance and advice.
- Want a share of the business, so may lose some control of the business.
- Lots of business knowledge and have good contacts.
- Difficult to find.
What is crowd funding?
- Raising money from a large number of people usually via the internet.
- Rewards are usually offered for donations.
- Raises awareness of the brand.
- If business fails, it will gain a bad reputation quickly.
- Ideas could potentially be copied.
What are other businesses as a source of finance?
- Offer finance to a firm that aids its own success.
- May lose shares in the business.
- Other businesses may gain some control and affect some decisions.
What is an overdraft?
A bank lets a business have a negative amount of money in its bank account. Interest is paid back on how much they use in the overdraft.
What is leasing?
This is paying to use another firm’s asset.
- More costly in the long run but good in the short run.
What is a grant?
Fixed sum of money given to a business by the government to fund a specific project.
- They don’t need repaying.
What is trade credit?
When a business buys a good or service and doesn’t have to pay straight away - the business pays within an agreed time limit.
What is a loan?
- When a fixed amount of money is borrowed and paid back over a fixed period of time.
What is share capital?
Money raised by selling shares in a business.
- Used by limited companies.
What is venture capital?
Money provided to a business via business angels, when they see potential for growth in a business.
What is unlimited liability
A businesses debts become personal debts of the owners
What is limited liability
Owners are not personally responsable for the debts of the business.
Having limited liability allows for businesses to more easily ……
Raise finance from external sources, due to being a safer option of investment.
