2.1.2 - External Finance Flashcards
What is the difference between a Source of Finance and a Method of Finance?
Source - where the finance has come from
Method - the use of a finance
What are 6 Sources of External Finance?
1) Family and Friends
2) Banks
3) Peer to peer funding
4) Business angels
5) Crowd funding
6) Other businesses
What are the 2 Advantages of the Source of Finance FAMILY AND FRIENDS?
- 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
What are the 2 Advantages of the Source of Finance BANKS?
- Lend to business Without Asking For a % of the Ownership
- Allow the Business Owner to Continue Running the Business their Own Way
What are the 2 Disadvantages of the Source of Finance FAMILY AND FRIENDS?
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
How are Banks a source of Finance?
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
What are the 2 Disadvantages of the Source of Finance BANKS?
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
What does the source of finance Peer to Peer funding involve?
Involves raising a loan from a group of individuals or institutions
Very FLEXIBLE source of borrowing
What are the 1 Advantages and 2 Disadvantages of the Source of Finance Peer to Peer Funding
+ 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
What is the Source of finance BUSINESS ANGELS?
they’re WEALTHY, entrepreneurial INDIVIDUALS who PROVIDE CAPITAL in RETURN for a PROPORTION of the COMPANY EQUITY
What are the 2 Advantages of the Source of Finance BUSINESS ANGELS?
Angels are free to make investment decisions quickly
Owner will have NO REPAYMENTS or INTEREST on the money lent
What is the 1 Disadvantage of the Source of Finance BUSINESS ANGELS?
OWNER NEEDS to GIVE UP a SHARE of the BUSINESS
What is the 1 Disadvantage of the Source of Finance BUSINESS ANGELS?
OWNER NEEDS to GIVE UP a SHARE of the BUSINESS
What is the Source of Finance CROWD FUNDING?
where a large number of people FUND a PROJECT over the internet making small investments each
Describe the 3 ways to fund through CROWD FUNDING
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
What are the 3 Advantages of the Source of Finance CROWD FUNDING?
+ 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
What are the 1 Disadvantage of the Source of Finance CROWD FUNDING?
- Business will need to SHOWCASE their idea investors and may need to put together a video and other promotion to ATTRACT INVESTORS
What are 7 Methods of External Finance?
1) Loans
2) Share Capital
3) Venture Capital
4) Overdrafts
5) Leasing
6) Trade Credit
7) Grants
What is the Method of Finance, LOAN?
A FIXED AMOUNT from a bank, which is generally used to FINANCE LONG TERM ASSETS
What is an advantage of the Method of Finance, LOANS?
+ As the loan is fixed for some time, the business OWNER can PLAN AHEAD and KNOWS exactly what the REPAYMENTS will be
What are 2 Disadvantages of the Method of Finance, LOANS?
- 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
What is the Method of Finance Share Capital?
what type of company would this only apply to
Money INVESTED in a COMPANY by the SHAREHOLDERS
Long Term
ONLY PUBLIC LIMITED COMPANY
What are 2 Advantages of the Method of Finance, SHARE CAPITAL?
+ COST-EFFECTIVE, NO INTEREST
+ INVESTORS are often PREPARED to PROVIDE EXTRA funding as the business grows
What is 1 Disadvantage of the Method of Finance, SHARE CAPITAL?
the More Shares Sold, the More the Profits have to be Divided Up and Paid Out to investors as Dividends
How are Venture Capitalists a Method of Finance?
they INVEST LARGE sums of OTHER PEOPLE’S MONEY in a business IN RETURN for SHARES
What are 2 Advantages of the Method of Finance, VENTURE CAPITAL?
+ 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.
What is 1 Disadvantage of the Method of Finance, VENTURE CAPITAL?
venture capitalists firms LOOK FOR a STRING BUSINESS PLAN , making it DIFFICULT, and for start ups
What is the Method of Finance, OVERDRAFT?
SHORT TERM lending of SMALL AMOUNTS of money
What are 2 Advantages of the Method of Finance OVERDRAFTS?
+ 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
What is 1 Disadvantage of the Method of Finance OVERDRAFTS?
- VERY EXPENSIVE, HIGH charges & INTEREST
What is the Method of Finance, LEASING?
TEMPORARY TRANSFER of ASSETS
What is 1 Advantage of the Method of Finance, LEASING?
+ LOWER MONTHLY COSTS for a business owner THAN a LOAN
What is the Method of Finance TRADE CREDIT?
amounts OWED to SUPPLIERS of a business
30, 60, 90 days to pay
What are 2 Advantages of the Method of Finance TRADE CREDIT ?
+ NO INTEREST
+ Businesses that PAY REGULARLY ON TIME can build relationships with suppliers and secure BETTER DEALS
What is 1 Disadvantage of the Method of Finance - TRADE CREDIT ?
- IF the business owner DOESN’T PAY IN TIME they risk being REFUSED FUTURE CREDIT by the supplier in the FUTURE
What is the Method of Finance GRANTS?
sum of MONEY provided by the GOVERNMENT to a business that doesn’t have to be repaid
owners keep full control
What are 2 Advantages of the Method of Finance, GRANTS?
+ usually DOESN’T have to be PAYED BACK
+ NO INTEREST
What is 1 Disadvantage of the Method of Finance, GRANTS?
- a LOT of COMPETITION FOR GRANTS
application process can be very complex and time-consuming.
