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Business - beli > 2.1.2 External Finance > Flashcards

2.1.2 External Finance Flashcards

1
Q

External finance

A

Capital raised from outside the business

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2
Q

Sources of finance

A

Where the finance is coming from

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3
Q

Methods of finance

A

How the finance is provided

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4
Q

Examples of sources of finance

A

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

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5
Q

Different methods of finance

A

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

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6
Q

Family and friends

A

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

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7
Q

Advantages of family and friends

A

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

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8
Q

Disadvantages of family and friends

A

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

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9
Q

What type of business is friends and family best for

A

Small businesses running as sole traders or possibly a partner

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10
Q

Peer to peer funding

A

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

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11
Q

Advantages of peer to peer funding

A

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

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12
Q

Disadvantages of peer to peer funding

A

Finance is restricted to small amounts and small established businesses

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13
Q

Business angels

A

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

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14
Q

What do business angles offer other than capital

A

Support and expertise

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15
Q

Advantages of business angles

A

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

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16
Q

Disadvantages of business angels

A

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

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17
Q

Crowdfunding

A

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

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18
Q

Advantages of crowd funding

A

Millions of potential founders globally

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19
Q

Disadvantages of crowdfunding

A

Sufficient finance may not be raised

20
Q

Crowdfunding is best for what type of businesses

A

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

21
Q

Other businesses

A

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

22
Q

Advantages of other businesses

A

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

23
Q

Disadvantages of other businesses

A

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

24
Q

Loans

A

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

25
Q

Advantages of loans

A

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

26
Q

Disadvantages of loans

A

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

27
Q

Share capital

A

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

28
Q

How will shareholders be rewarded for their investment

A

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

29
Q

Advantages of share capital

A

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

30
Q

Disadvantages of share capital

A

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

31
Q

Venture capital

A

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

32
Q

What type of businesses use venture capital

A

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

33
Q

Advantages of venture capital

A

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

34
Q

Disadvantages of venture capital

A

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

35
Q

Overdrafts

A

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

36
Q

Advantages of overdraft

A

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

37
Q

Disadvantages of overdrafts

A

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

38
Q

Leasing

A

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

39
Q

Advantages of leasing

A

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

40
Q

Disadvantages of leasing

A

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

41
Q

Trade credit

A

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

42
Q

Advantages of trade credit

A

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

43
Q

Disadvantages of trade credit

A

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

44
Q

Grants

A

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

45
Q

What type of business are grants especially useful for

A

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

46
Q

Advantages of grants

A

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

Business - beli (18 decks)

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