2.1.2 external finance

Question 1

external finance (def.)

Answer 1

ways to secure funding outside the business

Question 2

external finance adv.

Answer 2

fund the business growth faster

can receive useful advice from outside the business

Question 3

external finance dis.

Answer 3

can be expensive - especially if there’s interest involved

can potentially lose control of the business

Question 4

family and friends adv.

Answer 4

can be flexible

less need for a formal business plan

Question 5

family and friends dis.

Answer 5

could damage personal relationships

they might want to get more involved in the business

Question 6

banks adv.

Answer 6

trusted, commercial institutions

owners keep full control of the business

Question 7

banks dis.

Answer 7

less flexible

not as easy to obtain funding

Question 8

peer-to-peer lending (def.)

Answer 8

an alternative form of lending without the need for a financial institution

Question 9

peer-to-peer lending adv.

Answer 9

connects businesses and individuals

Question 10

business angels (def.)

Answer 10

wealthy individuals using their personal capital

Question 11

venture capitalist (def.)

Answer 11

individuals part of a company specialised in investments

Question 12

crowd funding (def.)

Answer 12

small amounts of capital raised by a large number of investors

Question 13

crowd funding adv.

Answer 13

quick and easy way to raise finance

business is in full control of what is offered

can generate early publicity of the good/service

Question 14

crowd funding (dis.)

Answer 14

potential high service fees (taken by the platform)

intense competition - business idea could be leaked

Question 15

bank loans (def.)

Answer 15

loan given to a business over a fixed period of time (long-term source of finance)

Question 16

bank loans adv.

Answer 16

generally lower interest compared to overdrafts

Question 17

bank loans dis.

Answer 17

requires security/harder to manage

less flexible than overdrafts

Question 18

overdrafts (def.)

Answer 18

loan given to businesses within a short period of time (short-term source of finance)

Question 19

overdrafts adv.

Answer 19

does not require security

flexible - only borrow what is needed

Question 20

overdrafts dis.

Answer 20

extra fees/charges may apply

generally high interest is incurred

Question 21

trade credit (def.)

Answer 21

buy stock from suppliers now, but pay later (short-term source of finance)

Question 22

trade credit adv.

Answer 22

firms can negotiate the payback period

helps pay any unexpected costs in the short-run

Question 23

trade credit dis.

Answer 23

penalties/extra fees could be charged if not paid on time

requires strong relationship with suppliers

Question 24

share capital (def.)

Answer 24

finance raised through the issue of share of investors

Question 25

share capital adv.

Answer 25

if the business makes no profit, then no dividends will have to be paid to shareholders

Question 26

share capital dis.

Answer 26

firms have to pay dividends to shareholders

lose control of business

Question 27

leasing (def.)

Answer 27

renting assets for a fixed, regular payment instead of purchasing it outright

Question 28

leasing adv.

Answer 28

cash is not tied up (can be used elsewhere in the business)

owner of the asset is responsible for maintenance, not the firm

Question 29

leasing dis.

Answer 29

continual cost to the firm (cannot be sold)

Question 30

grants (def.)

Answer 30

one-off cash payments given to firms by the government/other organisations

Question 31

grants adv.

Answer 31

does not need to be paid back

no impact on business ownership

Question 32

grants dis.

Answer 32

not available to all firms (must meet certain criteria)