Summary
Complete Unit 2 Business Summary
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Pearson Edexcel IAL Business Unit 2 summary
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Sources of FinanceRaising finance – The process of raising capital in order to fund the business in its early stages.
Internal Finance
Owner’s capital of friends and family
+ no need to pay interest.
+ deadline can be discussed
+ large amount of control with low risk.
- Funds not significant .:. other methods of raising finance may be required
- Slow payments .:. damage personal relations of entrepreneur.
Retained profit
+ No interest payments.
+ Full control
- Slow process.
- Opportunity cost
Sales of assets
+ struggling with cash flow.
+ clear obsolete and redundant goods
- not receive full market value
- Tax consequences
- not sufficient alone to fund a business’ project
- Assets depreciate over time
External Finance
Bank loans:
+ relatively easy to obtain, as banks are willing to lend money to businesses with good
credit histories.
- expensive, as they typically have high interest rates
- may require collateral
Share capital:
selling shares in the company to investors .:. shareholders
+ good way to raise large amounts of money
+ share ownership with its investors
- shareholders may have a say in how the company is run .:. limit entrepreneur's control.
,Peer-to-peer funding .:. individuals lending money to each other directly.
+ for businesses that may not qualify for a bank loan
+ less restrictive.
- more expensive than bank loans
- higher interest rates.
Crowdfunding .:. large number of people, typically through an online platform.
+ for a new business or project
+ reach a wide audience
- risky .:. no guarantee that you will raise the right amount
Venture capital .:. providing money to early-stage companies in exchange for a share of
ownership
+ good way to raise large amounts of money
- very risky
- only invest in businesses with the potential to grow very quickly .:. may control over the
business
Business angels .:. individuals who invest their own money in early-stage companies
+ good source of funding and advice for businesses
- expect a significant return on their investment
Trade credit .:. suppliers extending credit to businesses.
+ buy now and pay later
+ manage cash flow,
- late payments damage your reputation
Leasing .:. renting assets, such as equipment or vehicles
+ acquire assets without having to pay for them upfront
- expensive, monthly payments.
- may not own the assets at the end of the lease term.
Government grants .:. financial rewards
+ good way to raise money for certain types of businesses or projects.
- very competitive
- strict eligibility requirements.
Overdrafts .:. loan that allows you to borrow money from your bank up to a certain limit.
+ good way to cover short-term cash flow problems.
- expensive, high interest rates.
- damage your credit score.
Limited Liability
, Unlimited liability .:. owner is personally liable for the debts of the business.
-> the business fails, the owner may have to sell their personal assets to pay off the debts.
Limited liability .:. owner is not personally liable for the debts of the business
-> the business fails, the owner's personal assets are protected.
Factors to consider when raising finance:
● Short-term or long-term finance? immediate costs or larger projects & investments.
● Financial status of the business? good credit history & able to afford the repayments.
● The amount of collateral available? property or equipment, in order to secure a loan.
● The purpose of finance? clear plan for how the money will be used.
● Legal status of the business? whether sole trader, partnership, limited company, or
public limited company.
Appropriate finance depending on liability:
Unlimited liability:
● Personal savings
● Mortgage
● Unsecured bank loans
● Peer to peer funding
● Overdraft
● Grants
Limited liability:
● Share capital
● Long term loans (debentures)
● Retained profit
● Venture capital
● Business angels
● Debenture
Is limited liability good for stakeholders?
Limited Liability: Private limited companies and Public limited companies.
Yes, limited liability is good for stakeholders...
● owner and business are different legal entities.
● shareholders losses are limited to how much they invested in the business.
● encourages shareholders to invest in companies on a larger scale
● in turn will leads to development of larger established businesses.
● Assuming: have adequate cash-flow as it improves the risk of non-receipt of debts to
stakeholders.
No limited liability is not good for stakeholders...
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