2.1.1/2 INTERNAL/EXTERNAL FINANCE Flashcards
what is owners capital
personal savings of the original owner of a business
what is retained profit
the profit that has been generated in previous years and not distributed to owners is reinvested back into the business
what is sale of assets
selling of business assets which are no longer required generates a source of finance
benefits of using internal finance
- doesn’t include 3rd parties who may want to influence business decisions
- often free and no payment of interest
disadvantages of using internal finance
- significant opportunity cost
- may not be sufficient funds
what is external finance
sourced from outside the business
what is internal finance
sourced from within the business
advantage of family and friends finance
- usually a very cheap source of funds
- may have ‘no strings attached’
disadvantage of family and friends finance
- relationships may be damaged if the finance isn’t repaid
banks as a source of finance
they provide several types of loans to businesses
advantages of bank loans
- may offer both short and long term finance
- often provide free advice
- quick to obtain
disadvantages of bank loans
- business plan is required to obtain one
- interest
- businesses must be customers of the bank to request a loan
what’s peer to peer funding
individuals with savings available to them often take this money and pool it with others in a peer investment scheme such as a funding circle
advantages of using p2p funding
funding circle can then make loans available to businesses very quickly
disadvantages of using p2p funding
borrowers are charged a fee to access finance and have to pay interest
what are business angels
wealthy individuals who invest in small startups for a stake in the company, offering not just funds but also expertise and networking
advantages of business angels
- tend to be more willing to take a risk than banks are
- they have experience and expertise
disadvantages of business angels
- potential conflicts over decision making
- risk of loosing control over the business
what’s crowdfunding
collecting small amounts of money from a large number of people, typically through online platforms
advantages of crowdfunding
- access to a large pool of potential investors, - increased exposure for the business
- validation of the idea by the crowd
- potential for early customer engagement
disadvantages of crowdfunding
-the need to meet campaign goals to receive funds
- platform fees
- potential intellectual property risks
- the challenge of standing out among many campaigns
what is share capital
finance raised from the sale of shares in a limited company
advantages of share capital
- raising funds without incurring debt
- sharing financial risk among shareholders
- attracting investors with profit-sharing potential
- enhancing the company’s credibility
disadvantages of share capital
- dilution of ownership for existing shareholders
- potential loss of control over decision-making - the obligation to pay dividends to shareholders
what is venture capital
funds provided by specialist investors in small to medium sized businesses that have significant potential for growth
advantages of venture capital
- access to substantial funding
- expertise and guidance from experienced investors
- networking opportunities
- potential for rapid business growth
disadvantages of venture capital
- loss of control and decision-making power
- pressure to achieve high growth targets
- potential conflicts with investors
- the need to give up equity in the business
what’s an overdraft
an arrangement for business current account holders to spend more money than it has in their account
advantages of overdrafts
- flexibility in borrowing
- quick access to funds
- interest charged only on the amount overdrawn
- the ability to cover short-term cash flow gaps
disadvantages of overdrafts
- high-interest rates
- potential for unexpected fees
- dependency on short-term borrowing
- the risk of overdrawing beyond the agreed limit
what is leasing
an asset such as a piece of machinery is used by the business in return for regular payments to the suppliers
advantages of leasing
- the business doesn’t own the asset so is not responsible for maintenance or repair costs
- lower initial costs
- access to newer equipment
- flexibility to upgrade
- potential tax benefits
disadvantages of leasing
- higher overall costs compared to purchasing
- restrictions on customisation
- potential for long-term financial commitments
- the lack of ownership of the leased assets
what is trade credit
when an agreement is made with suppliers to buy raw materials which are payed for at a later date
advantages of trade credit
- usually interest free
- improved cash flow
- potential for extended payment terms
- opportunity to build relationships with suppliers
- flexibility in managing short-term financing needs
disadvantages of trade credit
- potential strain on supplier relationships
- higher overall costs due to interest or fees
- risk of dependency on credit terms
- the impact on credit ratings if payments are delayed
what are grants
when governments and industry trusts may offer grants to businesses that meet specific criteria
advantages of grants
- don’t need to be repaid
disadvantages of grants
- restrictions on fund usage
- reporting requirement
what is unlimited liability
