raising finance
- Created by: amy
- Created on: 17-05-13 11:37
Key terms
- ORDINARY SHARE CAPITAL- raising capital via selling shares and part ownership of the company to outside investors who are entitled to a share of the profits via dividends.
- OVERDRAFT- a short-term source of finance that allows a business to spend more than they have in their current account up to an agreed limit. Interest is charged daily.
- BANK LOAN- a medium to long-term source of finance which will require some form of collateral and for which interest is charged.
- PERSONAL EQUITY- personal sources of finance generated by the owner of the business
- VENTURE CAPITAL- the provision of finance and advice by specialist firms to 'high risk' businesses in return for share capital and the prospect of future high returns.
- MORTGAGE- a specialised long-term source of finance used for the purposes of buying property.
- BUSINESS ANGEL- a private individual willing to offer both advice and financial support to a risky business in return for share capital or a share in the profits.
- CAPITAL EXPENDITURE- spending upon fixed assets such as land, building and machinery.
- REVENUE EXPENDITURE- spending upon day-to-day items used in the operations of a business e.g. stationary and stock.
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Key terms
- ORDINARY SHARE CAPITAL- raising capital via selling shares and part ownership of the company to outside investors who are entitled to a share of the profits via dividends.
- OVERDRAFT- a short-term source of finance that allows a business to spend more than they have in their current account up to an agreed limit. Interest is charged daily.
- BANK LOAN- a medium to long-term source of finance which will require some form of collateral and for which interest is charged.
- PERSONAL EQUITY- personal sources of finance generated by the owner of the business
- VENTURE CAPITAL- the provision of finance and advice by specialist firms to 'high risk' businesses in return for share capital and the prospect of future high returns.
- MORTGAGE- a specialised long-term source of finance used for the purposes of buying property.
- BUSINESS ANGEL- a private individual willing to offer both advice and financial support to a risky business in return for share capital or a share in the profits.
- CAPITAL EXPENDITURE- spending upon fixed assets such as land, building and machinery.
- REVENUE EXPENDITURE- spending upon day-to-day items used in the operations of a business e.g. stationary and stock.
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Personal Sources in Finance
Personal Savings
- No interest needs to be paid
- might not have enough
- opportunity cost!
Mortgages
- can borrow a reasonable amount of capital at a cheaper rate than a normal loan
- if the business fails your own home is at risk!
- Borrow from family and friends
- might not have to pay interest
- can add stress and strain to relationships
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Ordinary Share Capital
- only available to incorporated businesses
- tends to be a major source of finance for larger firms
- there is limited liability
- there is a risk of losing some control to shareholders and the original aims of the business might be lost in the drive towards profits.
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Loan Capital
- Bank Loans
- repayments and interest rates are known helping with budgeting
- the bank can also provide advice and support
- the size of the loan can be matched to the needs of the firm
- loans offer limited flexibility and the size of the loan is dependant upon levels of available collateral
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Venture Capital
- money offered to 'high risk' firms rejected by banks
- cash provided through a mixture of loan and share capital
- it is in the venture capitalist's interests to provide help and advice
- firms have to be prepared to lose significant levels of control
- venture capitalists might demand high returns and have a large influence on daily affairs
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Capital and revenue expenditure
Long term finance is more appropriate when purchasing capital items such as land, buildings, machinery, vehicles etc.
Long Term sources of finance (3-5 years)
- share capital
- loans
- venture capital
- personal sources
If you are mainly spending money on revenue items such as stock and wages then these offer short-term returns and therefore short-term sources of finance are more appropriate.
Short Term sources of finance (1 year)
- Personal Sources
- Bank Overdraft
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Choosing a source of finance
- Only Ltd's or Plc's can sell shares
- Sole traders and partnerships are more reliant upon personal sources of finance and banks
- Consider how much money is required-if it is a large amount then a long-term sources of finance will be most appropriate
- How much risk is there for the lender? If the firm is high risk then venture capital might be used
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