2.1.2 External Finance Flashcards
What is the purpose of collateral when taking a bank loan
Collateral is used to guarantee the loan and reduce the risk of non payment which reduces the interest rate
What is meant by peer to peer lending and when might this used by a business
Is when a business and wealthy individual lends to each other. Loans are more likely to be granted and at a lower interest rate than a bank as there are lower overheads
What is meant by a business angel
Is a business person who invests in business start ups in return for equity and gives mentoring
Distinguish between peer to peer lending and a business angel
Business angel = equity/ mentoring
Peer to peer = debt, no involvement
What is meant by crowd funding
When a portal is used where lots of small investors fund new business start ups in return for limited editions stock, shares or discounts
Advantage and disadvantage of crowdfunding
Don’t have to pay back, publicity
Not all ideas are funding and hit target
What is meant by a loan
Money borrowed and repack with interest over an agreed time period
Distinguish between fixed and variable interest rates
Fixed interest doesn’t change for a period of time. Variable can change during the life of the load depending on Bank of England base rate
Advantage and disadvantage of a loan
Advantage = no loss of control, interest rates might be very low Disadvantage = repayments have to be made even if business is making a loss
What is meant by share capital as a source of finance
Is when shareholders provide finance in return for owning parts of the business
Advantage and disadvantage of share finance
Advantages = no repayment or interest Disadvantage = manage shareholder expectations and loss of control
What is meant by venture capital
When professional investors provide finance in return for equity/ shares
When might a business use venture capital as a source of finance
Might use this option for more risky projects that aren’t funded by banks, where new investment is needed to expansion when large amounts are needed
What is meant by an overdraft
Is a shirt term source of finance where a business can spend money from its current account that it doesn’t have to pay back
When would it be appropriate to use an overdraft as a source of finance
Short term lack of funds or more unpredictable shortfalls or expenses
Advantage and disadvantage of overdraft
Advantage = only borrow what is needed, so can reduce amounts owed, flexible Disadvantage = high interest rates, bank could request full payment at short notice
What is meant by leasing
Isnwhere a non current asset is rented rather than brought online
Advantage and disadvantage of leasing
Advantage = no upfront capital costs, maintenance and service so expenses predictable Disadvantage = never own the asset, can be more expensive than a loan for the same item
What is meant by trade credit
Trade credit is when a business purchases raw materials or inventory from suppliers and pays later
When might businesses use trade credit as a source of finance
For stock/ inventory
Advantage and disadvantage of trade credit
Advantage = improves cash flow because only pay stock after a period of time, by which customer may have paid you Disadvantage = interest may be charged if not paid on time
What is meant by a grant
A grant is a lump sum given to a business by the government
When might a business be able to use grants as a source of finance
Grants are used by business eg are going to benefit society in some way
Identify one advantage and one disadvantage to a business of using grants as a source of finance
Advantage = doesn’t need to be repaid and there is no loss of control Disadvantage = not all businesses will qualify and there are lengthy approval processes
Identify two methods of finance in which interest must be paid to the bank
Interest must be paid to peer to peer lending, loans, overdrafts and sometimes trade credit
Which method of finance is not available to sole traders or partnerships
Selling shares, business angel and venture capital is not available to sole traders and partnerships
What is meant by limited liability
Limited liability is when the owner of a business can only lose the mount that they out into the business if the business goes bankrupt
Which type of business ownership has limited liability
PLC public limited companies and LTD private limited companies
What is the name given to the owners of a limited company
Shareholders are the owners of a limited liability company
What is meant by unlimited liability
When the owner of the business can lose personal possessions in the business goes bankrupt
Which type of business ownership has unlimited liability
Sole traders and partnerships have unlimited liability
Which sources of finance are available to sole traders and partnerships
Sole traders and partnerships can use crowd funding, grants, leasing, trade credit, overdraft, loans and led to peer lending
Which additional sources of finance are available of LTDS and PLCs
LTDS and PLCs can use all these, plus business angels, venture capital and share capital
