2.1.2 External Finance

Question 1

External finance

Answer 1

Capital raised from outside the business

Question 2

Sources of finance

Answer 2

Where the finance is coming from

Question 3

Methods of finance

Answer 3

How the finance is provided

Question 4

Examples of sources of finance

Answer 4

Family and friends, banks, peer to peer funding, business angles, crows finding, other businesses

Question 5

Different methods of finance

Answer 5

Loans, share capital, venture capital, overdrafts, leasing, trade credit, grants

Question 6

Family and friends

Answer 6

Investment from people known to the entrepreneur who want to support business

Question 7

Advantages of family and friends

Answer 7

May be flexible repayment terms and conditions, may provide interest free of low rate finance

Question 8

Disadvantages of family and friends

Answer 8

Amount may be limited, may place pressure on relationships, lenders may lose money

Question 9

What type of business is friends and family best for

Answer 9

Small businesses running as sole traders or possibly a partner

Question 10

Peer to peer funding

Answer 10

The practice of an individual lending to other individuals with whom there is no relationship

Question 11

Advantages of peer to peer funding

Answer 11

Gives borrowers access to funds at advantageous rates compared to some other forms of finance

Question 12

Disadvantages of peer to peer funding

Answer 12

Finance is restricted to small amounts and small established businesses

Question 13

Business angels

Answer 13

Usually high net worth individuals who invest into a start up business in return for equity

Question 14

What do business angles offer other than capital

Answer 14

Support and expertise

Question 15

Advantages of business angles

Answer 15

Very knowledgable and experienced, act as mentor for business, provides guidance and advice

Question 16

Disadvantages of business angels

Answer 16

May require some for of equity which gives them a measure of control

Question 17

Crowdfunding

Answer 17

Raises money by inviting lots of people to lend small sums of money via websites

Question 18

Advantages of crowd funding

Answer 18

Millions of potential founders globally

Question 19

Disadvantages of crowdfunding

Answer 19

Sufficient finance may not be raised

Question 20

Crowdfunding is best for what type of businesses

Answer 20

Unusual ideas and projects that might to attract other forms of finance

Question 21

Other businesses

Answer 21

Funds can be provided to other businesses known as B2B funding, businesses with healthy cash balance look to invest into other business

Question 22

Advantages of other businesses

Answer 22

Includes trade credit, hire Prichard and leasing and corporate venture capital

Question 23

Disadvantages of other businesses

Answer 23

Trade credit is usually short term, factoring reduces profitability, hire purchasing and leasing can be expensive, venture capital may involve loss of control

Question 24

Loans

Answer 24

A set amount of money provided for a specific purpose to be repaid with interest over a period of time

Question 25

Advantages of loans

Answer 25

Quick and easy to secure, fixed interest rates allow firm to budget, improved cash flow, borrower retains ownership of company

Question 26

Disadvantages of loans

Answer 26

Interest must be paid regardless of financial performance, a firm usually has to provide security known as collateral, can be charged a penalty for early repayments

Question 27

Share capital

Answer 27

Finance raised through the sales of shares by only private and public limited companies.

Question 28

How will shareholders be rewarded for their investment

Answer 28

Shareholder becomes part owner of the business, repayment of dividends and the increasing value of their share rises

Question 29

Advantages of share capital

Answer 29

Only need to pay dividend if a profit is being made and the amount of dividend is not fixed, possible to raise large amounts of finance, no interest repayments

Question 30

Disadvantages of share capital

Answer 30

Loss of ownership, potential risk of loss of control - threat of hostile takeover, complex and costly process of issuing shares

Question 31

Venture capital

Answer 31

Investment from an established business into another business in return for a percentage

Question 32

What type of businesses use venture capital

Answer 32

High risk businesses with potential for rapid growth or high returns usually associated with high risk start ups

Question 33

Advantages of venture capital

Answer 33

Potential for large sums of money, expertise to help business, makes it easier to attract other sources of finance, provides required capital from expansion

Question 34

Disadvantages of venture capital

Answer 34

Long and complex process because venture capitalist hard to find, partial loss of ownership, initially expensive for firm - legal and accounting fees, venture capitalist require high rate of return

Question 35

Overdrafts

Answer 35

The facility to overspend on a current account up to an agreed sum temporarily

Question 36

Advantages of overdraft

Answer 36

Only borrowed when required allowing flexibility, only pay for the money borrowed, quick and easy to arrange, no charges for paying of the overdraft

Question 37

Disadvantages of overdrafts

Answer 37

The bank can call it in at any time, only available from current bank account, interest payments tend to be variable making it hard to get a budget, banks may secure the overdraft against the businesses assets

Question 38

Leasing

Answer 38

Allows a business to benefit from the use of an asset without owning or buying it outright

Question 39

Advantages of leasing

Answer 39

Avoids need to finance asset, lease company responsible for any repairs or maintenance

Question 40

Disadvantages of leasing

Answer 40

More costly in long run, if business cash flow is unreliable, regular repayments can be a problem

Question 41

Trade credit

Answer 41

Paying suppliers a period of time after the goods or services have been received eg stock

Question 42

Advantages of trade credit

Answer 42

It helps with cash flow problems, gives businesses time to sell the output before paying invoices

Question 43

Disadvantages of trade credit

Answer 43

Business may loose out on discounts offered for the immediate or quick repayment increasing costs, not suitable for long term or large purchases

Question 44

Grants

Answer 44

Fixed amounts of capital provided to business by the government to fund specific projects

Question 45

What type of business are grants especially useful for

Answer 45

Large businesses, or businesses needing large sum of capital injected into their business

Question 46

Advantages of grants

Answer 46

Located in high area of deprivation, provide employment, reduce negative environmental impacts, support a good cause