2.1 External Finance Flashcards
Whats external finance?
Capital raised from outside the business
Whats a loan?
A set amount of money which needs repaying with interest
It may be secured against an asset
Whats the advantages of a loan?
Potentially raise a large amount of money
Borrower retains ownership & control
Repayments can be spread over multiple years
Lower interest on loan than on overdraft
Disadvantages of a loan
Interest must be paid
If a firm has high levels of debt they msy be considered high risk and not offered it
May have to provide collateral
Can take a while to get
What is share captial
selling shares to get finance
A form of equity capital
Shareholders get a percentage of profits (dividends), also benefit from share price rising
Whats the pros of share capital?
Large amounts of finance
No interest
No requirement to pay dividends
Cons of share capital?
Loss of ownership + control
Shareholders have voting rights
LTDs may be limited
PLCs may not raise as much finance as investers may not want to invest due to poor finances/ reputation
What is venture capital?
Investment from an establised business or investor into another business for a share
THey look for high rate of return
Often used by high risk start ups
Advantages of share capital?
Business can benefit from the expertise and stuff from venture capitalists
Potential to get a lot of money
Dont have to pay back
Reduce risk of business failure and attrack investors
Cons of venture capitals?
Lose some control
Conflicts may arrise
Complex, Expensive and time-consuming
They want high returns
What is an overdraft?
AN external source of finance provided by banks and building societes
Allows users to overspend on current accounts
Pros of overdraft?
Flexible
No charges to pay off an overdraft
Cons of overdraft?
High interest
Banks may need colateral
Banks can withdraw overdrafts at anytime
What is leasing?
Use of an asset over a fixed period of time with fixed payments
Pros of leasing
Leasing company maintains asset
Business dont have to pay the high cost of buying outright
Cons of leasing
May be more expensive in the long run
Business dont own the asset
Cant use asset as collateral
What is trade credit?
Paying supllier a period of time after recieving their product
Pros of trade credit?
No interest
Can pay the suppliers when they can afford it
Cons of trade creit
May incur fees for late payments
Late payments may damage relationship
May get a worse deal on the products
What are grants
A fixed amount of finance provided by the government
One off cash payment
Pros of grants
No repayments
No loss of control
Can be a decent amount
Cons of grants
May not be available
Can be time consuming and the firm may not even get it
Grants may require certain conditions
