Business revision, Raising finance (2.1) *UPDATED*

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Why may entrepreneurs and businesses raise finance?
Funding the set up of the business, increasing efficiency, developing production areas and expanding their current business, pay off debts.
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What are the two main sources of finance available to businesses?
Internal and external.
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What are internal sources?
They're finances raised from within the business.
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What are examples of internal sources of finance?
Selling company assets, retained profit, sales of stock, owners investment, debt collection.
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What are external sources of finance?
Finances raised from outside of the company.
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What are some examples of external sources of finance?
Issuing shares, bank loans, mortgage, debenture, investment.
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What are personal savings as a source of finance?
This is also known as the owners capital, it is the amount of cash that the business owner invests in the firm.
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What type of businesses commonly use personal savings as a source of finance and why?
Businesses such as sole traders, partnerships and fresh startups because they have little in the way of assets.
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What are the advantages of using personal savings as a source of finance?
Cash is quick to access since it is the business owner who is making the investment. If an owner is personally invested in the company they will take more interest and care of the business.
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What are the disadvantages of using personal savings as a source of finance?
Any loss of profits for the business is a serious loss for the owner who was invested so much. Owners can be over-controlling of a business if they are also the investors.
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What is retained profit?
This is the profit the business keeps and uses in the following year (after all expenses, taxes and shareholders dividends have been paid).
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What are the advantages of using retained profit as a source of finance?
If a business were to apply for a bank loan, they would need to provide reports and data on their activities - as they already earned retained profits no confidential info is required. Can lead to devlp of the business increasing the value of shares.
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What are the disadvantages of using retained profit as a source of finance?
Shareholders may start to wonder why they're not receiving higher dividends - can lead to de-investment and unhappy shareholders. Opportunity cost - whether or not to invest or save the profits.
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What is the sale of assets in terms of sources of finance?
This involves a business selling off their possessions, such as property or vehicles in order to generate finance.
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What type of businesses don't usually tend to do this and why?
New start up businesses don't generally use this source of finance because they will not have any assets that they can afford to sell.
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What are the advantages of using the sales of assets as a source of finance?
Allows the business to focus their funds on developing themselves, rather than keeping money locked up in assets. The finance is freely available to the business, as they need to do is sell the asset.
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What are the disadvantages of using the sales of assets as a source of finance?
An asset is no longer an asset once it is sold, businesses may need their sold assets in the future so it could have been a mistake. The business needs to ensure the asset is worth less to it than the potential earnings it could make.
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What is meant by family and friends as a source of finance?
This is usually used by small businesses as a source of finance and is often a source of finance at the establishment of the business. Businesses will look to family and friends for support.
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What are the advantages of using family and friends as a source of finance?
They can negotiate a payback period that suits all parties and will be easier to negotiate. Securing the finance will be relatively quick process.
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What are the disadvantages of using family and friends as a source of finance?
If they contribute significant amounts of finance to the business and the business later expands and is successful they will want more. Family and friends would therefore have more of a say in the business and are able to make more decisions.
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How are banks a source of finance?
Businesses can receive loans from the business or have the ability to go into overdraft.
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What are the advantages of using banks as a source of finance?
Potential to access large amounts of money. The bank will not be a shareholder of the business so they have no jurisdiction in this aspect.
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What are the disadvantages of using banks as a source of finance?
Banks often require strict payback plans for borrowers. Interest rates can increase, generating more costs for the business.
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What is meant by peer-to-peer funding as a source of finance?
This source of finance can involve any number of people. Businesses request this by making formal applications , each application will explain how much money the business needs and what they do with it. It is posted online so investors can see.
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What are the advantages of using peer-to-peer funding as a source of finance?
Few financial costs involved for the business. Acts as a forum for business proposals.
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What are the disadvantages of using peer-to-peer funding as a source of finance?
It is a time dependent process - if the business does not gain its full targeted investment by the time limit all funding is revoked. It takes significant time and effort to promote the funding.
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What are business angels in terms of sources of finance?
They're investors which offer their money and services to businesses often in exchange for a stake in the company. Business angels generally concentrate on bets that are 'unsafe'.
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What are the advantages of using business angels as a source of finance?
Can be a last resort option. They also offer management advice which can be vital to small business owners. Can invest large amounts of money.
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What are the disadvantages of using business angels as a source of finance?
The business angels lead negotiations as usually the business will be struggling so they're their best hope. Business angels can ask for significant shares in the business which may cause conflict between management.
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What is crowd funding?
Similar to peer to peer funding. Peer to peer funding is a loan whereas crowd funding offers a grant in return for products or discounted products when they're released. Businesses will often post their business idea online with a financial goal.
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What are the advantages of using crowd funding as a source of finance?
Few financial costs as it is online. Acts as a forum for business proposals.
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What are the disadvantages of using crowd funding as a source of finance?
A time dependent process - if the business doesn't receive the full funding in the set time then all funds will be revoked. Takes time and effort to advertise the crowd funding campaign.
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How can other businesses be used as a source of finance?
Often, big businesses will buy shares in smaller businesses, especially if they operate in the same market. Small firms are valuable as they control niche parts of the market, something big firms can take advantage of.
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What are the advantages of using other businesses as a source of finance?
Have more funding available to support the development of small firms. If a large business buys significant amounts of shares in the small firm then they can grant access to marketing power and commercial contacts, expanding the business.
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What are the disadvantages of using other businesses as a source of finance?
If large businesses own large amounts of shares they will have a significant power over decisions which can cause conflict. Small business may change processes and ethics which can lose customers. May use small firm in a negative way.
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-the following are methods of finance-
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What are overdrafts?
This is when banks offer overdrafts to most of their customers and businesses. It allows people to spend money which they currently don't have, basically debt. People will pay the money back when they get it and usually with an interest.
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What are the advantages of overdrafts?
They're flexible, businesses can use them then they need and pay back the money as soon as they get it. Businesses don't need to propose anything
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What are the disadvantages of overdrafts?
Interest rates are high. Amount of money covered by overdrafts is often limited.
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What is a loan?
They're provided by banks and other financial establishments. Loans have to be planned and applied for. Businesses will have to prove they can pay back the banks and agree upon an amount and a payback plan.
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What are loans often used for?
Expensive equipment such as factory equipment, or an extra building.
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What are the advantages of loans?
The amount and payback plan is negotiable with the bank. Interest rates are generally lower than that of overdrafts.
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What are the disadvantages of loans?
Businesses must normally provide a security deposit for loans such as deeds to a property. The loan provider will probably only loan up to the amount that the business has in assets.
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What is share capital?
This is when the business will divide up its ownership through the amount of shares people have. e.g if there are two entrepreneurs then they will each have a 50% share (if negotiated). Firms can become public or private limited company.
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What are the advantages of share capital?
Companies only pay shareholders if they have been profitable. Investors have limited liability on their shares- this means that they do not have to pay the business any more than their share.
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What are the disadvantages of share capital?
Investors can gain a large amount of control. Shareholders expect dividends if a company is profitable, which means less money goes back into the business.
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What is venture capital?
This starts with a proposal, a business puts forward a plan to an investor to explain what the business wishes to do and how much money they need. If successful money will be granted in return for a stake in the business usually.
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What are the advantages of venture capital?
Venture capitalists are often business leaders so can act as advisors. Venture capitalists aim for big rewards by taking risks so are more likely to invest.
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What are the disadvantages of venture capital?
The venture capitalist is taking a risk and so expects a stake in the company in return, this can lead to high demand of dividend payments. Investors can become too involved with a company and cause conflicts of interest.
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What is leasing?
Many businesses choose leasing over purchasing items such as property, vehicles or equipment. This is often favoured for short term projects and when businesses don't have the funds to purchase things.
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What are the advantages of leasing?
Businesses that lease do not have large amounts of money wrapped up in expensive assets so have cash left over. Owner of the property is responsible for its maintenance rather than the business.
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What are the disadvantages of leasing?
Leasing is a continual cost and don't have the option to sell it. If the owner of the leased item decides to sell it the business have no say over this.
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What is trade credit?
This is when businesses make purchases from suppliers, they often negotiate a payback period. If the supplier allows a business to pay back in 8 weeks the business wont pay in the first few days.
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What are the advantages of trade credit?
Businesses can negotiate different terms with different suppliers to make it so they always have enough funds. Paying in 8 weeks rather than 1 ensures the business has cash to spend on innovation+development.
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What are the disadvantages of trade credit?
Businesses must be sure they are going to have the cash available to pay on that date - can lead to consequences. If businesses are unreliable then they will get a bad reputation and less suppliers will deal with them.
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What are grants?
They're provided by many different entities, including government bodies, financial institutions etc. Businesses must submit proposals to the grant provider which shows what they'll do with the money. The money does not have to be paid back.
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What are the advantages of grants?
Funding does not cost the business as there is no payback required. The grant provider isn't looking for a stake in the business.
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What are the disadvantages of grants?
There are often terms and compromises businesses must make in order to receive them to suit the provider. Applicant must meet requirements of the provider to gain the grant.
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Card 2

Front

What are the two main sources of finance available to businesses?

Back

Internal and external.

Card 3

Front

What are internal sources?

Back

Preview of the front of card 3

Card 4

Front

What are examples of internal sources of finance?

Back

Preview of the front of card 4

Card 5

Front

What are external sources of finance?

Back

Preview of the front of card 5
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