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A level Edexcel business > 2.1.2 External finance > Flashcards

2.1.2 External finance Flashcards

1
Q

What is External finance?

A

sourced from outside of the business

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2
Q

Examples of sources of External finance

A

family and friends, banks, peer-to-peer funding, business angels, crowdfunding, and other businesses

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3
Q

Advantages and disadvantages of using Family and friends

A
  • Usually a very cheap source of funds
  • May have ‘no strings attached’ and can be provided to the business on very flexible terms
  • Relationships may be damaged if the finance is not repaid
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4
Q

Advantages and disadvantages of using Banks

A
  • Provide several different kinds of loans to businesses
  • Small sums may be borrowed from unsecured
  • May offer both short term finance (e.g. overdrafts) and long term finance (e.g. loans or mortgages) if a business qualifies
  • Banks are often keen to provide free advice and guidance to businesses that use their services
  • A business plan is usually required to access bank finance
  • Banks can be cautious about lending to new, untested businesses
  • Interest is payable
  • Businesses must be customers of the bank (i.e. hold a banking account) to access some loans
  • For larger amounts, businesses may need to provide security (collateral which is something of value that is used as security when a loan is offered) to be granted a loan
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5
Q

What is Peer-to-peer funding?

A

Individuals with savings available to them often take this money and pool it with others in a peer investment scheme

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6
Q

Advantages and disadvantages of using peer-to-peer funding

A
  • Provide several different kinds of loans to businesses
  • Small sums may be borrowed from unsecured
  • May offer both short term finance (e.g. overdrafts) and long term finance (e.g. loans or mortgages) if a business qualifies
  • Banks are often keen to provide free advice and guidance to businesses that use their services
  • A business plan is usually required to access bank finance
  • Banks can be cautious about lending to new, untested businesses
  • Interest is payable
  • Businesses must be customers of the bank (i.e. hold a banking account) to access some loans
  • For larger amounts, businesses may need to provide security to be granted a loan
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7
Q

What are Business angels?

A

Individuals who specialise in making investments in start-up or expanding businesses e.g. Dragons Den investors

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8
Q

Advantages and disadvantages of using Business angels

A
  • Tend to be more willing to take a risk than banks
  • Bring expertise and other support
  • Bring significant amount of finance
  • As business angels own a stake in the business, they may be involved in decision-making and will receive a share of business profits
  • In most cases getting the support of a business angel relies on knowing the ‘right people so networking is vital when entrepreneurs seek this kind of investment
  • Finding the ‘right’ business angel (e.g. with appropriate experience, expertise or interest) can be challenging
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9
Q

What is Crowdfunding?

A

Allows businesses to access finance provided by a large number of small investors on online platforms such as Kickstarter

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10
Q

Advantages and disadvantages of using Crowdfunding

A
  • Many small investors can be gathered in order to provide all the finance needed
  • Businesses need to provide a persuasive business plan to convince individuals to invest in their product as they will be competing with many other projects online
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11
Q

What is meant by Other businesses?

A

A business could get to access finance via a joint venture with another business, such as a key customer or supplier

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12
Q

Name the External methods of finance

A

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

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13
Q

What is a Loan?

A

A sum of money which is borrowed and repaid (with interest) over a determined period of time

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14
Q

Name the types of Loans

A
  • Bank loans are usually unsecured and are typically repaid over two to ten years. Interest rates are fixed for the term of the loan so repayments are made in equal instalments.
  • Mortgages are long-term secured loans and are typically used by a business to purchase buildings, land or large items of capital equipment. Interest is payable and assets are at risk if the business does not make repayments as planned.Repayments are variable, and linked to the current interest rate
  • Debentures are long-term agreements between a business and a lender to repay a specified amount (with a fixed rate of interest) by a certain date. Debenture holders are creditors rather than owners of a business and do not hold voting rights
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15
Q

Advantages and disadvantages of Loans

A
  • Easy and quick to access
  • Can get a significant amount of money at one time
  • Have to pay interest
  • Difficult for a new business to access
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16
Q

What is Share capital?

A

Finance raised from the sale of shares in a limited company

17
Q

Advantages and disadvantages of Share capital

A
  • There are no dividends to be paid if the business has a poor year – Shareholders are not promised dividends every year, as dividends are only paid if the business has made sufficient money to pay all of its costs.
  • Source of permanent capital – Shareholders cannot have a refund on their shares. Instead, if they want to sell their shares, they must find someone else to sell them to
  • Shareholders are the owners of shares and they are entitled to a share of the company’s profit when dividends are declared
    -It dilutes business ownership as the more shares that are issued, the more shareholders there are who own part of the business. This results in the owners having less control.
  • Business is vulnerable to takeover as when a business grows and sells more shares, it becomes vulnerable to the threat of a takeover. This is because the shares are sold publicly and if an individual or group buys enough shares, they can persuade other shareholders to vote for a new management team.
18
Q

What is Venture capital?

A

Funds provided by specialist investors in small to medium-sized businesses that have significant potential for growth

19
Q

Advantages and disadvantages of Venture capital

A
  • Businesses that may have been refused finance from other sources may seek the investment of less risk-averse venture capitalists
  • Used to fund a significant period of growth for an established small business

-Venture capitalists usually require a stake in the business in return for finance and often expect to exert some control over the business and its decisions
- Investment is high risk so loan is likely to be at a relatively high intest rate

20
Q

What is an Overdraft?

A

An arrangement for business current account holders to spend more money than it has in their account

21
Q

Advantages and disadvantages of Overdrafts

A
  • Limit is agreed and interest is charged only when a business ‘goes overdrawn’
  • Offers significant flexibility and aids cash flow
  • May be ‘called in’ if the bank is concerned about a business’s ability to repay what it owes
  • Higher interest rates than loans
  • A short-term source of finance
22
Q

What is Leasing?

A

An asset such as a piece of machinery or a vehicle used by the business in return for regular payments

23
Q

Advantages and disadvantages of Leasing

A
  • The business does not own the asset during the period of the lease and so is not responsible for maintenance or repair costs
  • Leasing is usually more expensive in the long run than buying an asset
24
Q

What is Trade credit?

A

An agreement is made with suppliers to buy raw materials, components and stock which are paid for at a later date, typically 30 to 90 days later

25
Q

Advantages and disadvantages of Trade credit

A
  • Usually interest-free
  • Not all businesses will be able to access trade credit
  • Start ups or those with a poor record of payment in the past may be refused credit by suppliers
26
Q

What is a Grant?

A

Handouts usually to small business from local or central government

27
Q

Advantages and disadvantages of Grants

A
  • Don’t need to be repaid
  • Have to meet a specific criteria
  • Very rare

A level Edexcel business (9 decks)

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