This is a revision booklet that summarises the entire syllabus of theme 2 and 3 which helps you prepare for any topic that can come up in paper 2. This can be used for Edexcel students as well as aqa.
,2.1 Raising Finance
2.1.1 Internal finance
Raising finance – The process of raising capital in order to fund the business in its early
stages.
Types of internal Finance: (within the business)
Owner’s capital of friends and family – Attaining capital (start-up) money by using your
own funds or borrowing money from either friends or family.
The entrepreneur does not need to pay interest.
The money deadline can be discussed, as it is not a formal method of raising
finance.
Large amount of control with low risk.
Funds will not be significant, so other methods of raising finance may be required.
Slow payments, which may damage personal relations of entrepreneur.
Retained profit – Profit kept in the company rather than paid out to shareholders as a
dividend.
No interest payments.
Full control -> Business has less stakeholders to appease and entrepreneur is more
motivated due to more profit (no dividends)
Slow process.
Opportunity cost -> Less money for when business may need it (E.G Contingency).
Sales of assets – Selling an item of property owned by a person or company in exchange
for cash.
Best for companies struggling with cash flow.
Can be used to sell obsolete and redundant goods which are taking up space.
May not receive full market value for the product, depending on the seller.
Tax consequences.
May not be sufficient alone to fund for a business’ project. Assets depreciate over
time
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,2.1.2 External finance:
Bank loans – Borrowed from a bank for a certain amount of time with an agreed interest
payment.
The entrepreneur will maintain control of the business.
Sufficient for funding large scale projects/investments -> Attractive if interest rates
are low
Can get fixed interest loan to help plan budget
Lacks flexibility, as you have to pay interest on the whole amount borrowed even if
you don’t need all of it.
Not guaranteed to get it if you are not considered solvent by the bank
Interest payments.
Share capital – The amount of money invested by shareholders in exchange for
ownership. Considered a long-term method of finance.
Sufficient for large scale projects and investments -> Encourages businesses to
reinvest and improve efficiency -> More cost competitive -> Higher sales from lower
prices
Business can use money straight away.
Perspectives of shareholders on decisions could be useful -> Most lucrative decision
likely to be made
Entrepreneur loses control of the business -> Demotivating -> Potentially less
commitment
Dividend payments to appease shareholders -> Potential stakeholder conflict
Peer-to-peer funding – A group of individuals lending money to a business directly without
a financial intermediary.
Flexible borrowing (less formal)
Quicker method of raising finance due to no intermediary
No equity needs to be given.
Can be a scam -> Higher risk due to less certainty of lender for borrower
Damaging to personal relations
Lender can set their own interest rates which could be high
Crowd funding – The practice of funding a project by raising money from a large number of
people. E.G GoFundMe pages.
Online so business reaches a wider audience -> Exposure for business, good
promotion -> Helps build brand image immediately
Loyal customers
The cost of start-up can be quickly raised depending on promotion
Only 90 days to raise funds.
Investors get money back if amount is not reached.
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, Venture capital – funding is provided by an investor ( could be business angel) in exchange for a
share in the business.
+ The venture capital firm (investor) offers different forms of support including expertise in their
designated market to guide the business throughout their partnership.
+ The money injected by the investor/ VCF does not have to be paid back by the business.
+ The VCF provides recruitment specialists to the business, to find the most effective workers.
-The VCF take a large amount of control in the decisions regarding the business, E.G Adding members
of their workforce to the business’ management.
-The equity agreed means the business has to pay a percentage of their
annual profit to the VCF.
In some cases, the VCF can become the majority shareholder in the business, due to high levels of
investment
Trade credit – An agreement between a business and suppliers to give the business supplies early
without immediate payment. ( buy now pay later eg at the end of month)
Helps business meet a demand spike -> Higher customer satisfaction and higher market
share
Used to build trust and relationships between business and supplier.
Immediate replenishment in resources, suppliers are fast.
Relationships can deteriorate, if credit is not paid back on time.
Suppliers may charge their own interest rates.
Late payments can affect PR of business and reputation.
Leasing – A financial agreement in which a company pays to use something(eg a machine or
technology ) for a particular period of time. Types of leasing are hire purchase and regular leasing.
Does not have significant impact on cash flow as payments are spread out.
Lease payments will remain the same regardless of inflation changes.
With vehicles, businesses can get service/maintenance without paying.
The business may not be able to own the object after the lease time period.
Lease is seen as a debt, so it may make securing loans in the future more difficult.
Government grant – A financial award given by a local or national government to an eligible
grantee. The eligible grantee must be financially secure.
The business does not have to pay the grant money back.
Huge monetary reward.
Free promotion/exposure for the business.
Very competitive, so difficult to achieve grant.
Long application process.
Overdraft – A short term loan where the bank agrees to allow the customer to make withdrawals
and exceed their normal limit.
Fast source of finance.
Flexibility as customer can take as much as they want.
Good for cash flow, as it is an injection of money.
High interest rates.
Risk of property being seized if not paid back on time.
Unreliability as the bank can ask for money back at any time.
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