2.1.2 External Finance Flashcards
what are the external sources of finance
- family and friends
- banks
- peer-peer lenders
- business angels
- crowd funding
- other businesses
outline and evaluate family and friends as an external source of finance
- family and friends providing the business with money
+ likely to have no strings attached or be flexible with repayment - may be insufficient funds
- may cause conflict in relationships
outline and evaluate banks as a source of external finance
- offer methods of finance like loans, overdrafts and mortgages
+ can offer short and long term finance
+ give free advice and guidance - interest payments
- banks have strict lending criteria e.g. providing security or a business plan
outline and evaluate peer-to-peer funding as a source of external finance
- websites when lenders say how much money they are willing to lend and what kind of interest rate they are looking for
- Businesses say how much they want to borrow and for how long, they may also give details about what the money is for
+ often cheaper than bank loans - risky borrowers must pay more interest
outline and evaluate business angels as a source of external finance
- wealthy individuals who want to share their expertise and invest in new and innovative businesses for a share in the business
+ support with the business and lots of good contacts - giving the angel a share in the business gives away some control
- can be difficult to find an angel who is right for the businesses needs
outline and evaluate crowdfunding as an external source of finance
- large amount of people all contributing smaller amounts to reach a target amount
- typically over the internet, rewards are sometimes offered for those who donate e.g. early access, discounts etc.
+ raises awareness of the brand even if people don’t contribute - business idea is made public to encourage donations, ideas could be copied
outline and evaluate other businesses as a form of external finance
- businesses with a large retained profit may want to invest in another business, especially if interest rates are low
+ business may also invest in its own supplier, improving relationships - however the business providing the finance may want shares and some control
what are the short/medium-term methods of finance
Overdrafts
Leasing
Trade credit
Grants
outline and evaluate overdrafts as a short-term method of finance
- when a bank lets a business go into a negative amount of money in their bank account
+ It allows a business to be flexible and better manage its cash flow - there is a limit and interest is charged
outline and evaluate leasing as a short-term method of finance
- a business paying monthly sums over a fixed time period for an asset (like machinery)
+ business doesn’t have to pay large upfront cost
+ asset is often up to date and more reliable - more costly in the long-run
outline and evaluate trade credit as a short-term method of finance
- when a business buys a good or service they have a time period to pay for it (typically between 30 and 90 days)
+ usually interest free
X missing discounts when paying upfront
X failure to pay credit on time can cause problems
outline and evaluate grants as a short-term method of finance
- government and industry trusts may offer grants for a specific project
+ don’t need to be paid back
X must be used for intended purpose
what are the long-term methods of finance
Loans
Share capital
Venture capital
outline and evaluate loans as a long-term method of finance
- a fixed amount of money is borrowed and paid back within a fixed amount of time with interest
- can be a bank loan or a mortgage
+ The loan provider doesn’t own or have any control over the business
X it may be difficult for a business to arrange
X shouldn’t be used for day-to-day running of a business
what is the difference between a secure and unsecured loan
- a secure loan has assets that are at risk if the business is unable to pay the loan whereas an unsecured loan doesn’t require this
- mortgages and larger loans often require security
