2.1) Raising Finance) External Finance Flashcards
What is External Finance?
External Finance is money that comes from outside the business
Name the Sources of External Finance:
The Sources of External Finance include:
1) Family and Friends
2) Banks
3) Peer-to-Peer Funding
4) Business Angels
5) Crowdfunding
6) Other Businesses
Define Family and Friends as a Source of Finance:
Close acquaintances are approached by Small Business Owners to lend money to them
Define Banks as a Source of Finance:
A Bank lends a sum of money to a Business, typically with interest charged and requiring repayment over a Set Period
Define Peer-to-Peer Funding as a Source of Finance:
Individuals with available savings pool it with others in a Peer Investment Scheme, bypassing traditional Financial Institutions
Give an Example of a Business Angel Institution:
Dragons Den Investors
Define Business Angels as a Source of Finance:
A High net-worth individual invests in Start-Ups or Early-Stage Businesses, often providing Mentorship alongside Capital
Define Crowdfunding as a Source of Finance:
Raising Small amounts of Finance from a large number of Individuals, typically via Online Platforms
Give an Example of a Crowdfunding Website:
Kickstarter
Define Other Businesses as a Source of Finance:
Finance can be accessed via a Joint Venture with another Party, such as a Key Customer or Supplier, or a Takeover through buying over Half the Shares in another Business
What is a Joint Venture?
A Commercial Enterprise undertaken by two or more Parties, usually with a Key Customer or Supplier, sharing Operations under Mutual Benefit
What is a Takeover?
The acquisition of a Company by another, typically through the Purchase of over Half the Shares
What are the Benefits of Family and Friends as a Source of Finance?
- Flexible Terms
- Very Cheap Source of Funds
- Usually ‘no strings attached’ such as a Share of the Business
What are the Negatives of Family and Friends as a Source of Finance?
- Lack of Formal Processes and Expertise
- Relationships may be Damaged if the Finance isn’t repaid
- Limited Financial Resources Available
What are the Benefits of Banks as a Source of Finance?
- Can access both Short-Term and Long-Term Finance
- Banks are keen to provide Free Advice and Guidance
- Formal and Regulated Lending Processes
What are the Negatives of Banks as a Source of Finance?
- A Business Plan is usually required
- Often require Security for Large Amounts
- Businesses must be Customers of the Bank to access certain Finance
- Interest Rates can be Significant, adding to the Overall Cost of Financing
- A Credit History/Trading Record is typically required
What are the Benefits of Peer-to-Peer Funding as a Source of Finance?
- Loans can be made available very quickly
- Usually has “no strings attached” such as a Share of the Business
- Highly accessible for New Businesses lacking a Credit History/Trading Record
What are the Negatives of Peer-to-Peer Funding as a Source of Finance?
- Funding Platforms charge Fees to both Borrowers and Lenders
- Borrowers are often Charged a Small Borrowers Fee and have to pay Interest to the Lenders
- The availability of Lenders are Highly Unpredictable which can cause Uncertainty for the Business
What are the Benefits of Business Angels as a Source of Finance?
- Business Angels are more willing to take Risks than Banks
- They often bring Valuable Experience, Industry Connections, and Mentorship alongside their Investment
- Investment is usually for a Determined Period so Owners regain Shares in the Future
What are the Negatives of Business Angels as a Source of Finance?
- Finding an appropriate Business Angel with Suitable Experience, Expertise, or Interest can be Challenging
- As they own a Stake in the Business, they may be involved in Decision-Making and Receive a Share of Profits
What are the Benefits of Crowdfunding as a Source of Finance?
- The Platform provides a form of Free Marketing creating an Organic Customer Base
- A good option for New Businesses that lack a Credit History/Trading Record
- Tends to have more Flexible Terms and Conditions than Traditional Sources
What are the Negatives of Crowdfunding as a Source of Finance?
- Businesses need to provide a persuasive Business Plan to convince individuals to Invest due to high competition with other Projects Online
- Businesses have Ethical Responsibilities to their Investors, such as transparency, responsible investments, and openly communicating about Progress
- The potential for Negative Publicity if the Project fails in attracting enough Capital
What are the Benefits of Other Businesses as a Source of Finance?
- Partnering Businesses can share Essential Resources like Raw Materials, and Assets alongside the Finance
- Risk of Financial Burden and Operational Responsibilities are spread among Multiple Parties
- Easier to enter new Geographic Markets or Product Categories by leveraging shared Infrastructure and Customer Base
What are the Negatives of Other Businesses as a Source of Finance?
- Differing Goals and Objectives can lead to Disputes
- Profits must be shared Collectively
- Loss of Control or Complete Ownership
- Decisions may be Complex and require Careful Negotiations to serve all Interests
