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A LEVEL BUSINESS THEME 2 > 2.1.2 - External Finance > Flashcards

2.1.2 - External Finance Flashcards

1
Q

What is the difference between a Source of Finance and a Method of Finance?

A

Source - where the finance has come from

Method - the use of a finance

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2
Q

What are 6 Sources of External Finance?

A

1) Family and Friends
2) Banks
3) Peer to peer funding
4) Business angels
5) Crowd funding
6) Other businesses

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3
Q

What are the 2 Advantages of the Source of Finance FAMILY AND FRIENDS?

A
  • loans probably be Offered Without the Need for Security and at Lower Rates
  • Unlikely to need a Business Plan, may not need to write one
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4
Q

What are the 2 Advantages of the Source of Finance BANKS?

A
  • Lend to business Without Asking For a % of the Ownership
  • Allow the Business Owner to Continue Running the Business their Own Way
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5
Q

What are the 2 Disadvantages of the Source of Finance FAMILY AND FRIENDS?

A

Could cause TENSION and problems if FINANCE ISN’T REPAID or if the business doesn’t flourish
Could also DEMAND money back at SHORT NOTICE

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6
Q

How are Banks a source of Finance?

A

May lend a LOAN to a business to START UP or when a business wants to GROW and EXPAND
May provide a business an OVERDRAFT to HELP CASH FLOW PROBLEMS

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7
Q

What are the 2 Disadvantages of the Source of Finance BANKS?

A

LOANS can be EXPENSIVE compared to other sources

May be HARD for a NEW business owner to OBTAIN a LOAN as they have no historical data

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8
Q

What does the source of finance Peer to Peer funding involve?

A

Involves raising a loan from a group of individuals or institutions
Very FLEXIBLE source of borrowing

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9
Q

What are the 1 Advantages and 2 Disadvantages of the Source of Finance Peer to Peer Funding

A

+ Businesses can get access to funding within a week once approved

  • P2P loans are classified as private business loans
  • If there’s not enough individuals interested or willing to invest in loan, you May not be Able to Acquire Entire Amount a Business Needs
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10
Q

What is the Source of finance BUSINESS ANGELS?

A

they’re WEALTHY, entrepreneurial INDIVIDUALS who PROVIDE CAPITAL in RETURN for a PROPORTION of the COMPANY EQUITY

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11
Q

What are the 2 Advantages of the Source of Finance BUSINESS ANGELS?

A

Angels are free to make investment decisions quickly

Owner will have NO REPAYMENTS or INTEREST on the money lent

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12
Q

What is the 1 Disadvantage of the Source of Finance BUSINESS ANGELS?

A

OWNER NEEDS to GIVE UP a SHARE of the BUSINESS

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12
Q

What is the 1 Disadvantage of the Source of Finance BUSINESS ANGELS?

A

OWNER NEEDS to GIVE UP a SHARE of the BUSINESS

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13
Q

What is the Source of Finance CROWD FUNDING?

A

where a large number of people FUND a PROJECT over the internet making small investments each

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14
Q

Describe the 3 ways to fund through CROWD FUNDING

A

DONATE: no money back, but rewards like tickets
LEND: get money back with interest and satisfaction of contributing to success of a small business
INVEST: invest in a business in exchange for equity or shares which may increase in value

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15
Q

What are the 3 Advantages of the Source of Finance CROWD FUNDING?

A

+ GOOD ALTERNATIVE to loans for SMALL BUSINESS owners
+ Finance can be obtained WITHOUT PAYING UPFRONT FEES
+ Business can GENERATE FUNDS and also PROMOTE at the SAME TIME

16
Q

What are the 1 Disadvantage of the Source of Finance CROWD FUNDING?

A
  • Business will need to SHOWCASE their idea investors and may need to put together a video and other promotion to ATTRACT INVESTORS
17
Q

What are 7 Methods of External Finance?

A

1) Loans
2) Share Capital
3) Venture Capital
4) Overdrafts
5) Leasing
6) Trade Credit
7) Grants

18
Q

What is the Method of Finance, LOAN?

A

A FIXED AMOUNT from a bank, which is generally used to FINANCE LONG TERM ASSETS

19
Q

What is an advantage of the Method of Finance, LOANS?

A

+ As the loan is fixed for some time, the business OWNER can PLAN AHEAD and KNOWS exactly what the REPAYMENTS will be

20
Q

What are 2 Disadvantages of the Method of Finance, LOANS?

A
  • INTEREST RATES
  • a BANK will ASK for SECURITY or COLLATERAL on a loan, this may be a house or another asset that may be seized IF LOAN ISN’T PAID BACK
21
Q

What is the Method of Finance Share Capital?

what type of company would this only apply to

A

Money INVESTED in a COMPANY by the SHAREHOLDERS
Long Term
ONLY PUBLIC LIMITED COMPANY

22
Q

What are 2 Advantages of the Method of Finance, SHARE CAPITAL?

A

+ COST-EFFECTIVE, NO INTEREST

+ INVESTORS are often PREPARED to PROVIDE EXTRA funding as the business grows

23
Q

What is 1 Disadvantage of the Method of Finance, SHARE CAPITAL?

A

the More Shares Sold, the More the Profits have to be Divided Up and Paid Out to investors as Dividends

24
Q

How are Venture Capitalists a Method of Finance?

A

they INVEST LARGE sums of OTHER PEOPLE’S MONEY in a business IN RETURN for SHARES

25
Q

What are 2 Advantages of the Method of Finance, VENTURE CAPITAL?

A

+ USEFUL if business is looking to RAISE a LARGE AMOUNT of money in SHORT space of TIME
+ Business gets ALL SKILLS of the VENTURE CAPITAL BUSINESS, their network and links may increase revenue streams.

26
Q

What is 1 Disadvantage of the Method of Finance, VENTURE CAPITAL?

A

venture capitalists firms LOOK FOR a STRING BUSINESS PLAN , making it DIFFICULT, and for start ups

27
Q

What is the Method of Finance, OVERDRAFT?

A

SHORT TERM lending of SMALL AMOUNTS of money

28
Q

What are 2 Advantages of the Method of Finance OVERDRAFTS?

A

+ Businesses ONLY PAY INTEREST on the AMOUNT of money WITHDRAWN
+ Can be arranged with an INSTANT DECISION from the BANK on the phone or online

29
Q

What is 1 Disadvantage of the Method of Finance OVERDRAFTS?

A
  • VERY EXPENSIVE, HIGH charges & INTEREST
30
Q

What is the Method of Finance, LEASING?

A

TEMPORARY TRANSFER of ASSETS

31
Q

What is 1 Advantage of the Method of Finance, LEASING?

A

+ LOWER MONTHLY COSTS for a business owner THAN a LOAN

32
Q

What is the Method of Finance TRADE CREDIT?

A

amounts OWED to SUPPLIERS of a business

30, 60, 90 days to pay

33
Q

What are 2 Advantages of the Method of Finance TRADE CREDIT ?

A

+ NO INTEREST

+ Businesses that PAY REGULARLY ON TIME can build relationships with suppliers and secure BETTER DEALS

34
Q

What is 1 Disadvantage of the Method of Finance - TRADE CREDIT ?

A
  • IF the business owner DOESN’T PAY IN TIME they risk being REFUSED FUTURE CREDIT by the supplier in the FUTURE
35
Q

What is the Method of Finance GRANTS?

A

sum of MONEY provided by the GOVERNMENT to a business that doesn’t have to be repaid
owners keep full control

36
Q

What are 2 Advantages of the Method of Finance, GRANTS?

A

+ usually DOESN’T have to be PAYED BACK

+ NO INTEREST

37
Q

What is 1 Disadvantage of the Method of Finance, GRANTS?

A
  • a LOT of COMPETITION FOR GRANTS

application process can be very complex and time-consuming.

A LEVEL BUSINESS THEME 2 (19 decks)

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