2.1.2 external finance Flashcards
external finance (def.)
ways to secure funding outside the business
external finance adv.
fund the business growth faster
can receive useful advice from outside the business
external finance dis.
can be expensive - especially if there’s interest involved
can potentially lose control of the business
family and friends adv.
can be flexible
less need for a formal business plan
family and friends dis.
could damage personal relationships
they might want to get more involved in the business
banks adv.
trusted, commercial institutions
owners keep full control of the business
banks dis.
less flexible
not as easy to obtain funding
peer-to-peer lending (def.)
an alternative form of lending without the need for a financial institution
peer-to-peer lending adv.
connects businesses and individuals
business angels (def.)
wealthy individuals using their personal capital
venture capitalist (def.)
individuals part of a company specialised in investments
crowd funding (def.)
small amounts of capital raised by a large number of investors
crowd funding adv.
quick and easy way to raise finance
business is in full control of what is offered
can generate early publicity of the good/service
crowd funding (dis.)
potential high service fees (taken by the platform)
intense competition - business idea could be leaked
bank loans (def.)
loan given to a business over a fixed period of time (long-term source of finance)
bank loans adv.
generally lower interest compared to overdrafts
bank loans dis.
requires security/harder to manage
less flexible than overdrafts
overdrafts (def.)
loan given to businesses within a short period of time (short-term source of finance)
overdrafts adv.
does not require security
flexible - only borrow what is needed
overdrafts dis.
extra fees/charges may apply
generally high interest is incurred
trade credit (def.)
buy stock from suppliers now, but pay later (short-term source of finance)
trade credit adv.
firms can negotiate the payback period
helps pay any unexpected costs in the short-run
trade credit dis.
penalties/extra fees could be charged if not paid on time
requires strong relationship with suppliers
share capital (def.)
finance raised through the issue of share of investors
share capital adv.
if the business makes no profit, then no dividends will have to be paid to shareholders
share capital dis.
firms have to pay dividends to shareholders
lose control of business
leasing (def.)
renting assets for a fixed, regular payment instead of purchasing it outright
leasing adv.
cash is not tied up (can be used elsewhere in the business)
owner of the asset is responsible for maintenance, not the firm
leasing dis.
continual cost to the firm (cannot be sold)
grants (def.)
one-off cash payments given to firms by the government/other organisations
grants adv.
does not need to be paid back
no impact on business ownership
grants dis.
not available to all firms (must meet certain criteria)
