2.1) Raising Finance) External Finance

Question 1

What is External Finance?

Answer 1

External Finance is money that comes from outside the business

Question 2

Name the Sources of External Finance:

Answer 2

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

Question 3

Define Family and Friends as a Source of Finance:

Answer 3

Close acquaintances are approached by Small Business Owners to lend money to them

Question 4

Define Banks as a Source of Finance:

Answer 4

A Bank lends a sum of money to a Business, typically with interest charged and requiring repayment over a Set Period

Question 5

Define Peer-to-Peer Funding as a Source of Finance:

Answer 5

Individuals with available savings pool it with others in a Peer Investment Scheme, bypassing traditional Financial Institutions

Question 6

Give an Example of a Business Angel Institution:

Answer 6

Dragons Den Investors

Question 6

Define Business Angels as a Source of Finance:

Answer 6

A High net-worth individual invests in Start-Ups or Early-Stage Businesses, often providing Mentorship alongside Capital

Question 7

Define Crowdfunding as a Source of Finance:

Answer 7

Raising Small amounts of Finance from a large number of Individuals, typically via Online Platforms

Question 7

Give an Example of a Crowdfunding Website:

Answer 7

Kickstarter

Question 8

Define Other Businesses as a Source of Finance:

Answer 8

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

Question 9

What is a Joint Venture?

Answer 9

A Commercial Enterprise undertaken by two or more Parties, usually with a Key Customer or Supplier, sharing Operations under Mutual Benefit

Question 10

What is a Takeover?

Answer 10

The acquisition of a Company by another, typically through the Purchase of over Half the Shares

Question 11

What are the Benefits of Family and Friends as a Source of Finance?

Answer 11

• Flexible Terms
• Very Cheap Source of Funds
• Usually ‘no strings attached’ such as a Share of the Business

Question 12

What are the Negatives of Family and Friends as a Source of Finance?

Answer 12

• Lack of Formal Processes and Expertise
• Relationships may be Damaged if the Finance isn’t repaid
• Limited Financial Resources Available

Question 13

What are the Benefits of Banks as a Source of Finance?

Answer 13

• Can access both Short-Term and Long-Term Finance
• Banks are keen to provide Free Advice and Guidance
• Formal and Regulated Lending Processes

Question 14

What are the Negatives of Banks as a Source of Finance?

Answer 14

• 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

Question 15

What are the Benefits of Peer-to-Peer Funding as a Source of Finance?

Answer 15

• 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

Question 16

What are the Negatives of Peer-to-Peer Funding as a Source of Finance?

Answer 16

• 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

Question 17

What are the Benefits of Business Angels as a Source of Finance?

Answer 17

• 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

Question 18

What are the Negatives of Business Angels as a Source of Finance?

Answer 18

• 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

Question 19

What are the Benefits of Crowdfunding as a Source of Finance?

Answer 19

• 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

Question 20

What are the Negatives of Crowdfunding as a Source of Finance?

Answer 20

• 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

Question 21

What are the Benefits of Other Businesses as a Source of Finance?

Answer 21

• 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

Question 22

What are the Negatives of Other Businesses as a Source of Finance?

Answer 22

• 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