AQA GCSE Business - Finance

• Why do businesses need to raise finance

  - Start up costs

  - Growth

  - New resources

  - Day to day running costs

  - Research and development

  - Improve efficiency

  - Replace worn out assets
• Why do new businesses need to raise finance

  - Renting or buying a building

  - Vehicles

  - Advertising

  - Equipment and machinery

  - Inventories of raw materials
• What is meant by raising finance

  The process of getting the funds needed, for example, to start a new business
• What is a source of finance

  A means of raising funds that are required by a business for purposes such as expansion
• What are inventories

  Raw materials that have not yet been used or products that have been made, but not sold; these are also called stocks
• Why do established businesses need to raise finance

  - To expand

  - To improve efficiency (e.g. training, technology)

  - To develop new products
• What are internal sources of finance

  Money that is available from within a business, for example, retained profits from previous years
• Give examples of internal sources of finance

  - Owners funds

  - Retained profit

  - Selling assets

  - Owners investment
• What are owners funds, and which legal structures is it mainly used by

  - Money put into a business by its owner or owners

  - Sole traders or partnerships
• What are the benefits of using owner funds to raise finance

  - The business does not have to pay interest

  - No control over the business is given up

  - Provides a strong signal to other potential investors and the bank of the entrepreneurs commitment to the business
• What are the drawbacks of using owner funds to raise finance

  - Only a finite amount of owner funds

  - No external input is given to the business (e.g. other methods may result in advice from external stakeholders given)

  - Entrepreneur may have to use other sources of finance to fund the business
• What are retained profits and what type of business is most likely to use it

  - The part of a business's annual profit which is kept within the business to finance future investments

  - Established businesses that have made a profit
• What are the advantages of using retained profits to raise finance

  - No interest payments

  - Can be arranged immediately

  - No control/shares given up

  - Flexible; business owners have complete control over how any profits are reinvested and the proportion that is kept in the business, rather than paid out as dividends

  - Safe, low risk approach (e.g. during a recession) as there is no debt)
• What are the disadvantages of using retained profit to raise finance

  - only available to profitable businesses

  - May create conflict with shareholders (lower dividends)

  - Usually finite retained profit, resulting in slow growth as profits may not be high enough to finance the growth quickly

  - No expertise added; compared to debt and equity, there are no bank managers or shareholders to advise decisions
• What is an asset

  something that is owned by a business e.g. land, buildings, vehicles, and machinery
• In what two ways can an asset be sold

  - Selling assets such as buildings for cash

  - Selling an asset and leasing it back, so that it is still available for use
• What are the advantages of selling assets to raise finance

  - No interest payments

  - May keep assets (if leased back)

  - No control is given up

  - If you can find a buyer it is a quick form of raising finance
• What are the disadvantages of selling assets to raise finance

  - Many businesses do not have suitable assets

  - Leasing assets back means regular payments

  - There is only a finite number of times a business can sell assets

  - Risk of selling assets which may be needed by the business

  - Risk you cannot find a buyer

  - You may not receive a fair value for the asset if you are desperate to sell and take any offer

  - Value of assets depreciates over time (depending on what it is) so businesses may not sell for as much as they would like to

  - Likely to be short term
• What type of legal structure is selling assets to raise finance used by

  Established businesses
• What are the advantages of internal sources of finance

  - No loss of control

  - No interest paid
• What is the disadvantage of internal sources of finance

  - Opportunity cost (e.g. dividends)

  - No external influence, using an external source may result in external stakeholders advising the business
• What source of internal finance is best suited for; short term, medium term, and long term


  Short term; Cash in bank/owners funds, sale of assets

  Medium term; Retained profits, sale of assets

  Long term; retained profits, owners investment
• What is equity, give examples

  All non debt sources of finance (e.g. share capital)
• What are external sources of finance

  Money that comes from outside the business, e.g. a loan from a bank
• Give examples of external sources of finance

  - Bank loans

  - Mortgages

  - Overdrafts

  - New share issues

  - Hire purchase

  - Government grants

  - Trade credit

  - Venture capital

  - Loans from friends and family

  - Crowd funding
• What is trade credit

  A period of time which suppliers allow customers before payment for supplies must be made
• What are the benefits of using trade credit to raise finance

  - Simple to arrange and maintain if credit terms are met

  - Cheap form of short term finance (e.g. cheaper than overdraft)

  - No control of business is given up

  - No interest charged

  - Allows the business to use the goods in the manufacturing process and/or sell the goods before it pays the supplier, which will improve its cash flow position
• What are the drawbacks of using trade credit to raise finance

  - Risk of spoiling relationship with with supplier if credit terms are not met (long term consequences)

  - Large fine if you pay late (after credit terms)

  - Short term

  - Only small sums of money can be raised

  - Difficult for new start up business to negotiate trade credit with suppliers, as there is a risk that the business will fail and suppliers may end up not getting paid
• Which legal structure is using trade credit most useful to

  New/start up businesses
• What is a bank loan

  When a business borrows a sum of money and pays it back with interest over an agreed period of time
• What type of legal structure is a bank loan most likely used by

  - Mostly new/start up businesses

  - Can be used by any business
• What are the benefits of using bank loans (and mortgages) to raise finance

  - No shares given up, so the business keeps control

  - Repayments are made in instalments meaning the business can access substantial amounts of cash that does not need to be paid back in one go

  - Likely to have a lower interest rate than an overdraft, thus lower costs

  - Able to be bespoke to business needs (e.g. repayment terms)

  - Frequent repayments may improve credit rates (however, reliant on the fact that the business will make regular repayments)

  - Can be arranged quickly

  - Allows repayment over a long period of time
• What are the drawbacks of using bank loans (and mortgages) to raise finance

  - Assets will be taken if the business fails to repay (need limited liability)

  - Time consuming; a business would need to produce a detailed business plan to gain a bank loan

  - No flexibility as the business has to keep to the initial repayment terms; even if the business does not use all the money, interest must be paid on the full loan amount

  - Failure to make repayments can result in a worse credit score, limiting the possibilities of getting loans in the future

  - Not guaranteed to get a loan from the bank

  - Interest is charged

  - Bank may ask for a collateral, which increases costs; the bank can sell this if the business fails to repay the loan (in a mortgage, the house is the collateral)
• What is a collateral

  An asset that a bank holds as security for the repayment of a loan
• What is a mortgage

  Loans from banks and building societies that are used to buy land and buildings, such as offices and shops
• What is an overdraft

  When a business withdraws more cash from a bank account that it holds
• What type of business most commonly uses overdrafts as a source of finance

  Mostly new/start up businesses

  Can be used by any businesses
• What are the benefits of using overdrafts as a source of finance

  - Quick and simple to organise; immediate availability once agreed

  - Can be bespoke to the needs of each business (e.g. seasonal businesses or unexpected expenses)

  - No control of the business given up

  - Offers flexibility

  - Important source of finance for a business if it has a short term shortage of cash or unexpected cost to pay

  - Interest only paid on the amount used
• What are the drawbacks of using overdrafts as a source of finance

  - Higher interest rate compared to a loan (it is short term)

  - Bank could cancel or lower overdraft at any time (only happens if one has severe financial problems)

  - Persistent use of overdraft may ruin credit rating; this can increase interest rates on future loans and increase risk of rejection from banks to take a loan out (reduces ability to expand)

  - Bank may not agree to some businesses an overdraft
• What is new share issue

  When a limited company sells shares in exchange for a payment