IB Business Unit 3.1

Initial Public Offering

(IPO) refers to a business converting its legal status to a public limited company by floating (selling) its shares on a stock exchange for the first time.

Share issue

(also known as a share placement) exists when an existing public limited company raises further finance by selling more of its shares.

Advantages of Retained Profit

- Cheap, no interest - Doesn't have to be repaid - Flexible as business can select how to use - Owners have control without interference from financial institutions

Advantages of Sale of Assets

- If asset not being used it stops capital being tied up - No interest on borrowings required

Disadvantages of Sale of Assets

- New business lack assets to sell - It may be time consuming to find purchaser

Disadvantages of Retained Profit

- Often not significant in early years of business - If low, may not be enough for expansion - Overuse may leave no buffer for future growth opportunities - Too high may mean shareholders received very little as dividends

Internal Sources of Finance

- Personal Funds - Retained Profit - Sale of Assets

What factors should be considered when choosing a source of finance for a given situation?

- Purpose or use of funds - Cost - Status and size - Amount required - Desire to retain control - flexibility - State of the external environment - Gearing

Disadvantage of Personal Funds

- Risk involved in investment - Savings may not be sufficient to start/continue operations

External Sources of Finance

- Share Capital - Loan Capital - Overdrafts - Trade Credit - Grants - Subsidies - Debt Factoring - Leasing - Venture Capital - Business Angels

Types of Finance

- Short - Medium - Long

Advantage of Personal Funds

- Shows commitment to business -Maximises control by owner - Cheap source of finance, no interest

Long Term Finance

- funding obtained for the purpose of purchasing long-term fixed assets or expansion - approx. 5-30 year time frame - e.g. Long-term bank loan, Share capital

Short Term Finance

- money for daily operation - Under 12 month time frame - e.g. Bank overdraft, Trade Credit, Debt Factoring

Medium Term Finance

- money for the purchase of assets such as equipment and vehicles - 1-5 year time frame - e.g. Leasing, Medium-term bank loan, Grants

Advantage of hire purchase

1. A deposit (down payment) is required to secure a hire purchase deal from the lender 2. Buyers eventually owns the asset on payment of the last instalment (different from leasing) 3. Higher acceptance rates than other forms of unsecured borrowing.

Disadvantage of venture capital

1. A form of high-risk capital 2. Need to prepare lots of documentation (criteria) before the venture capitalists committee their capital in an investment project

Advantage of sale of assets

1. Allow a business to raise finance through the sale of land and buildings when a business has chosen to relocate. 2. Allow a business to raise finance by selling some of their fixed assets to survive a liquidity problem

Advantage of debt factoring

1. Allows a business to raise funds based on the value owed by its debtors 2. Offer between 80-85% of the outstanding payments from debtors within 24 hours which is beneficial compared to receiving money in 30 or 60 days' time (credit periods).— immediate source of finance 3. Legal responsibility

Advantage of debentures

1. Can be used for a vast range of organisations 2. Provides a long-term source of finance, without the business losing any control because debenture holders do not usually have ownership or voting right (they are unlike the shareholders)

Advantage of overdrafts

1. Commonly used when business have minor cash flow problems— provide flexibility 2. Usually more cost-effective than bank loans this is because the interest is charges on a daily basis 3. It is easy and quick to arrange, providing a good cash flow backup

Disadvantage of share capital

1. Company will lose control 2. The amount of money raised is uncertain 3. Division of profits— have to hear its profits with wider pool of investors

Disadvantage of overdrafts

1. Demand a relatively high rate of interest 2. They are repayable on demand from the lender Possibly to lose own assets

Advantage of grants and subsidies

1. Grants: Help small business start-ups or stimulate economic activity in regions or industries 2. Subsides: Benefits the society 3. The interest rate is usually very low 4. Gives organisation exposure and credibility and public exposure

Disadvantage of grants and subsidies

1. Grants: It is hard to obtain 2. Subsides: It does not cut into profit margins 3. Must be spent according to complex regulations and laws

Disadvantage of debt factoring

1. High fees charged by the service providers 2. Larger the value of debtors, the higher the charges tend to be due to the increased risks involved 3. Not all business are eligible to sued the service, especially smaller firms

Disadvantage of trade credit

1. If repayments are not made by deadlines, the business will receive a poor credit history which will severely damage the business's ability to secure loans 2. Only companies with credit history will get trade credit, this is especially difficult for new businesses

Disadvantage of debentures

1. Issuing this increases a firm's gearing 2. Raises interest payments to the lender and increases the firm's exposure to risk if interest rates increase 3. The firm has more borrowing as a percentage of its capital employed

Advantage of share capital

1. It can provide a huge amount of finance 2. Enable a business to grow and evolve

Advantage of retained profits

1. It does not incur any interest charges Could be used to prevent unforeseeable expenditure and emergencies 2. Maintain full control 3. Not required to seek help from the shareholders or lenders 4. Reduces the cost of issuing the external equity and also eliminates the losses incurred on under-pricing

Disadvantage of hire purchase

1. It is a form of buying on credit, so interest is charged but the lender on the amount borrowed 2. If the buyer defaults on the agreement (falls behind on repayments) then the lender can repossess the assets. 3. Usually costs more than buying the item upfront"

Disadvantage of retained profits

1. It's slow 2. Actual earnings could be limited meaning that the company may not be able to expand 3. May lead to over capitalisation because if the company uses more and more retained earnings, it leads to insufficient source of finance. 4. Deprive money that is owned by the shareholders 5. Can be misused by the company

Disadvantage of sale of assets

1. It's slow 2. Assets which are sold can no more accrue the business— reduces a company's capital value 3. Can incur taxes

Disadvantage of personal funds

1. Limited amount of money could slower down business expansion as well as growth 2. Personal risks

Advantage of loan capital

1. Maintain full ownership 2. It is usually fast to obtain which allow a business to quickly operate its decision 3. Business can repay the money gradually so that they won't be too stressful

Disadvantage of loan capital

1. Need to consider repayment 2. There are interests that need to be paid 3. May be difficult to obtain without substantial track record Possibility of losing personal assets

Advantage of personal funds

1. No need to pay interest because the money is not borrowed from other 2. It's less time-consuming because it does not require the person to prepare lots of things in order to borrow the money 3. Full control

Advantage of venture capital

1. Provide invaluable advice about the strategic direction of the business 2. Invest in small to medium-sized business that have high growth potential provide them opportunity to develop themselves

Advantage of business angels

1. Provides funding for firms that are unable to secure loans from banks and/or too small to attract the attention of venture capitalises 2. Can be a major advantage to the survival and success of a new business

Advantage of trade credit

1. Reduces capital requirement 2. Improves cash flows 3. Business can pay for the debts after they sell their products and earn the profits 4. Business can focus on sales, marketing and research

Advantage of leasing

1. Suitable for business customers who do not have the initial capital to but assets because it can be cheaper to lease assets 2. Repairs and maintenance are the responsibility of the lessor 3. The tax bill of the lessee is reduced because the spending on leased is classed as a business expense

Disadvantage of business angels

1. The owner loses some control to the business angel because they business angles are likely to take a proactive role in the setting up or running 2. Business might eventually have to buy out the stake owned by the business angel

Disadvantage of leasing

1. The ownership will be transferred even though the asset does not physically leave the business 2. In the long-term, it is more expansive than hire purchase or the outright purchase of the assets.

Credit Cards

A common type of short-term credit usually used by small businesses. The creditor is a bank. You buy now, but pay later.

Debt Factoring

A financial arrangement where the debt factor takes on the responsibility for collecting the debt owed to the business and provides the business with a percentage of the owed debt in cash.

Debt Factoring

A financial service whereby a factor collects debts on behalf of other businesses, in return for a fee.

Business Development Loan

A flexible loan specifically made to meet the needs of businesses

Leasing

A form of hiring whereby a contract is agreed between a leasing company and the customer. The lessee pays rental income to hire assets from the lessor, who is the legal owner of the assets.

Secured Loan

A loan in which the borrower agrees to give up an asset if the loan is not repaid. The asset is referred to as collateral.

Unsecured loan

A loan that is not backed up by any type of collateral. The borrower promises to pay back the loan based on their reputation/honor.

Mortgage

A secured loan for the purchase of property (land or buildings)

Sale and leaseback

A source of external finance involving a business selling a fixed asset but immediately leasing the asset back. In essence, the lessee transfers ownership to the lessor but the asset does not physically leave the business.

Leasing

A source of finance that allows a firm to use an asset without having to purchase it by cash

Trade Credit

Allows a business to 'buy now and pay later'. The credit provider does not receive and cash from the buyer until a later date.

Overdrafts

Allows a business to spend in excess of the amount in its bank account, up to a predetermined limit. They are the most flexible form of borrowing in the short term.

Loan Capital

Also known as debt capital, money sourced from financial institutions. Interest is charged on the loan to be repaid and repayments spread over a number of periods.

Trade Credit

An agreement between businesses that allows the buyer of goods or services to pay the seller at a later date, often on 30 day terms.

Hire Purchase

An asset is sold to a company which agrees to pay fixed repayments over an agreed time period - the asset belongs to the company

Overdraft

Bank allows a business borrowing up to an agreed limit as and when required.

Sale of assets

Business can sell their dormant assets (unused assets), such as selling old machinery and computer equipment that have been replaced.

Hire Purchase

Buying an asset over time in installments. The asset is usually legally owned by the creditor until all payments have been made.

Types of Accounts

Equity, Assets, Liabilities, Expenses, and Revenue

Share Issue

Exists when an existing public limited company raises further finance by selling more of its shares.

Capital expenditure is used to pay for the working capital of an organization.

False

Debentures are a long-term source of finance which give holders a fixed rate of return (interest) with company ownership and voting rights.

False

It is best if a business reduces obtaining finance from a variety of sources simply because this raises its financial risks.

False

Share issues by a company are considered to be internal sources of finance.

False

Venture capitalists tend to invest their money in medium- to large-sized businesses since they have the best investment track record.

False

Subsidies

Financial assistance granted by a government, a non-governmental organisation, or an individual to support business enterprises that are in the public interest.

Venture Capital

Financial capital provided by investors to high risk, high-potential start-up firms or small businesses. They usually want a say in the business decision making

Grant

Financial gifts from the government to support business activities

Personal Funds

Financial source mostly from personal savings

Subsidies

Financial support from the government used to lower the operating costs of a firm to help society

Subsidy

Financial support given to businesses from the government with the purpose of lowering production costs and therefore providing benefits to society.

Subsidies

Funded by the government to lower a firm's production costs as output provides extended benefits to society.

Grants

Funds usually provided by a government, foundation, trust, or other agency to businesses that don't have to be repaid. Often these come with 'strings attached'.

External Sources of Finance

Getting funds from outside the organization.

Internal Sources of Finance

Getting funds from within the organization.

Grants

Government financial gifts to support business activities. They are not expected to be repaid by the recipient.

Grants & subsidies

Grants are government financial gifts (non-repayable funds) to support business activities. They are not expected to be repaid by the recipient. Subsides are funned by the government to lower a firm's costs of production in order to provide extended benefits to society, e.g. farmers are often provided with subsides to stabilise food prices.

Venture Capital

High risk capital invested by venture capital firms, usually at the start of a business idea. The finance is usually in the form of loans and/or shares in the business venture.

Venture Capital

High-risk capital invested in business start-ups or expanding small businesses, that have good profit potential, but do not find it easy to obtain finances from other sources. Often specialist organizations or investment banks.

Business Angels

Highly affluent individuals who provide financial capital to small start-ups or entrepreneurs in return for ownership equity in their business

Initial public offering (IPO)

IT refers to a business covering its legal status to a public limited company floating (selling) its shares on a stock exchange for the first time

Business Angels

Individuals who invest their personal capital in a variety of businesses. Also provide support.

Capital Expenditure

Investment spending on fixed assets such as the purchase of land and buildings.

Trade credit

It allows a business to "buy now and pay later". The credit provider does not receive any cash from the buyer until a later date (usually allow between 30-60 days). Organisations that offer trade credit are know as creditors and their customers are known as debtors. 先給訂金，再分期付款

Hire purchase

It allows a business to pay its creditors in instalments, perhaps over 12 or 24 months. The asset is legally the property of the creditor until all payments have been made. 半年或一年把總共花的錢全部一次付完，前面要先給訂金

Debt factoring

It is a financial service whereby a factor (such as a bank) collects debts on behalf of other businesses, in return for a fee. Debtors are people or organisations that owe money to the business. 去討債

Leasing

It is a form of hiring whereby a contract is agreed between a leasing company (lessor) and the customer (the lessee). The lessee pays rental income to hire assets from the lessor, who is the legal owner of the assets. 租出去

Which of the following is a disadvantage of leasing capital equipment?

It is cheaper in the long run to buy capital equipment.

Venture capital

It is high-risk capital invested by venture capital firms, usually at the start of a business idea. The finance is usually in the form of loans and/or shares in the business venture.

Capital expenditure

It is investment spending on fixed assets such as the purchase of land and buildings

Retained profits

It is the value of surplus that the business keeps to use within the business after paying corporate taxes on its profits to the government and dividends to its shareholders. Some retained profits might also be kept in a contingency fund in case of emergencies and unforeseeable expenditure in the future.

External sources of finance

It means getting funds from outside the organisations, e.g. through debt (overdrafts, loans, and debentures), share capital, or the government

Internal sources of finance

It means getting funds from within the organisation, e.g. through personal funds, retained profits, and the sale of assets.

Loan capital

It refers to medium to long-term sources of interest-bearing finance obtained from commercial lenders. Examples include mortgages, business development loans and debentures. Interest charges are imposed and can be fixed or variable, depending on the agreement between borrower and the lender. The amount borrowed is paid back in instalments分期付款 over a predetermined period, such s 5 years. 跟銀行借錢然後分期付款

Share Capital

Money raised from sale of shares of a limited company. Dividends must be paid to shareholders as reward for investment in business.

External Finance

Money raised from sources outside the business (e.g. share issue, leasing, bank loan)

Internal Finance

Money raised from the business's own assets or from profits left in the business (retained profits)

Capital Expenditure

Money spent in order to acquire items that will be used for more than a year and repeatedly

Revenue Expenditure

Money spent on day-to-day operations of the firm

Retained Profit

Profit that remains after a business has paid tax and dividends

Initial Public Offering

Refers to a business converting its legal status to a public limited company by floating its shares on a stock exchange for the first time.

Loan Capital

Refers to medium to long-term sources of interest-bearing finance obtained from commercial lenders.

Revenue Expenditure

Refers to spending on the day-to-day running of a business, such as rent, wages and utility bills.

Leasing

Renting a product while ownership title remains with the lease grantor (lessor). The lessee pays rental income.

Debt-Factoring

Selling of claims over debtors to a debt factor in exchange for immediate liquidity.

Sales of assets

Selling unused assets

It is recommended that short time assets be financed by ....?

Short-term finance

Sources of Finance

The general term used to refer to where or how businesses obtain their funds, such as from personal funds, retained profits, loans and government grants.

Share Capital

The money raised from selling shares in a limited liability company, from its initial public offering and any subsequent share issues.

Retained Profit

The profit left, after all, deductions, including dividends, have been made. This is 'ploughed back' into the company as a source of finance

Retained Profit

The value of surplus that the business keeps to use within the business after paying corporate taxes on its profits to the government and dividends to its shares.

Debentures

Theses are essentially long-term loans issued by a business. Debenture holders (individuals, governments, or other businesses) receive interest payments even if the business makes a loss and before shareholders are paid any dividend. They interest payment can be fixed or a variable depending on the type of debenture.

Overdrafts

They allow a business to spend in excess of the amount in its bank account, up to a predetermined limit (to take out more money than it has in its account). They are the most flexible form of borrowing in the short term. 拿超過在帳戶裡的錢然後再還

Business angels

They are wealthy entrepreneurs who risk their own money by investing in small to medium-sized business that have high growth potential.

Share capital

This is the main source of finance for most limited liability companies. Share capital is the money raised from selling shares in the company.

Personal Funds

This is the main source of finance for sole traders and for partnerships. Use own money to fund.

Collateral acts as security to the lender in case debtors default on their loans.

True

Initial Public Offering refers to the original sales of a company's shares on the stock market, by offering its shares to the general public for the first time.

True

The spending on items considered to be fixed assets, such as land, buildings, machinery, and motor vehicles is called capital expenditure.

True

Retained Profits

Using the profits of a business to fund business activities

Business Angels

Wealthy entrepreneurs who risk their own money by investing in small to medium sized businesses that have high growth potential.

Trade Credit

When a business "buys now and pays later" Usually 30-60 days later.

Initial Public Offering

When a business becomes a public limited company and sells its shares on a stock exchange for the first time.

Sale-and-Lease Back

When a business sells a fixed asset and then immediately pays the new owner to use the asset

Share Issue

When a business that is already a public limited company sells more shares (not the first time it sells shares).

Overdrafts

When a lending institution allows a firm to withdraw more money than it currently has in its account. Interest charges are often high and banks can ask for repayment on short notice.

Sale of Assets

When business sells unwanted or unused assets to raise funds

Bad debt

When people/businesses are not able to pay their debt

Personal Funds

When someone uses their own money to fund their business

Leasing

When you rent the use of an asset without gaining ownership of the asset.

Overdrafts

allow a business to spend more than the amount available in their bank account.

Trade Credit

allows a business to 'buy now and pay later'. The credit provider does not receive any cash from the buyer until a later date (usually allow between 30-60 days).

Debentures

are a type of long-term loan with the promise of fixed annual interest payments to debenture holders and are repayable to maturity.

Grants

are government financial gifts to support business activities. They are not expected to be repaid by the recipient.

Creditors

are individuals or organizations that the business owes money to.

Business Angels

are wealthy entrepreneurs who risk their own money in small to medium sized businesses that have high growth potential.

Advantages of growth through share issue do not include __________.

control of the company is diluted

Advantages of internal finance do not include __________.

greater choice of finance

Which of the following is not a source of finance for an ordinary partnership?

initial public offer

Debt Factoring

is a financial service whereby a factor collects debts on behalf of other businesses, in return for a fee.

Venture Capital

is a high-risk capital invested by venture capital firms and individuals, usually at the start of a business idea.

Sale-and-leaseback

is a source of external finance involving a business selling a fixed asset (such as its computer systems or a building) but immediately leasing the asset back. In essence, the lessee transfers ownership to the lessor but the asset does not physicallyleavethe business.

Capital Expenditure

is investment spending on fixed assets such as the purchase of land and buildings.

Capital Expenditure

is spending on fixed assets such as the purchase of land and buildings.

Sources of finance

is the general term used to refer to where or how businesses obtain their funds, such as from personal funds, retained profits, loans and government grants.

Sources of Finance

is the general term used to refer to where or how businesses obtain their funds.

Share Capital

is the money raised from selling shares in a company

Share capital

is the money raised from selling shares in a limited liability company, from its initial public offering (IPO) and any subsequent share issues.

External Financing

means getting sources of finance from outside the organization.

Loan Capital

refers to medium to long-term sources of interest- bearing finance obtained from commercial lenders. Examples include mortgages, business development loans and debentures.

Loan Capital

refers to medium, to long-term sources of interest-bearing finance obtained from commercial leaders.

Revenue Expenditure

refers to spending on the day-to-day running of a business, such as rent, wages and utility bills.

Revenue expenditure

refers to spending on the day-to-day running of a business.

Which of the following is not a source of external financing for a public limited company?

retained profits

Which of the following is a drawback to a business that issues debentures?

value of liabilities increases

There must be sufficient finance to pay for the daily running of a business. This money is known as __________.

working capital