2.1.2 External Finance

Question 1

What is external finance

Answer 1

Finance that comes from outside the business

Question 2

External methods of finance

Answer 2

Trade credit
Loans
Overdrafts
Charge capital
Venture capital
Grant
Leasing

Question 3

External sources of finance

Answer 3

Other businesses
Banks (loans)
Business angels
Crowd funding
Family & friends
Peer 2 peer funding

Question 4

+/- of VC

Answer 4

+raise large sum in short amount of time
+get all skills of VC business & network links
+ great if refused loan
- strong business plan needed = difficult for start up
- typically want 20-30% of business

Question 5

+/- of grant

Answer 5

+ doesn’t have to be re paid
- have to meet certain criteria

Question 6

+/- of leasing

Answer 6

+ lower monthly cost than loan
+ ranged w/o advanced fees
+ leasing firm maintaining = always reliable
- may be more experienced long term

Question 7

+/- of loans

Answer 7

+ fixed = able to plan ahead & know exactly what repayments and when
- interest
- not very flexible
- ask for security / collateral

Question 8

+/- of trade credit

Answer 8

+ improves cash flow
- not suitable for a large amount of

Question 9

+/- of overdrafts

Answer 9

• not suitable 4 large amounts / long time
• if go over will be unauthorised & business will be charged
• very expensive - v high charges & interest rates
  + quick fix method
  + arranged otp/online

Question 10

+/- for bank loan

Answer 10

+ lend w/o asking for % of ownership
+ owner remains in control of the business
- expensive / interest must be paid back on time
- hard for new business to obtain

Question 11

+/- of family and friends

Answer 11

+ lower rates
+ unlikely to need a business plan
- may cause tensions and problems if finance is not repaid

Question 12

+/- of peer2peer funding

Answer 12

+ access writhing a week
+ high returns
+lower interest rates = lower costs
- difficult to obtain
- can want share of business and can loose control of the business

Question 13

+/- of business angels

Answer 13

+ get investors knowledge & contacts
+ no repayments / interest
- owner has to give up share

Question 14

+/- of crowd funding

Answer 14

+good alternative to loans
+ finance obtained w/o upfront fees
+generate funds and profit to promote business
- have to showcase ( time consuming)

Question 15

Factors to consider when choosing a source of finance

Answer 15

Amount of money required
Cheapest option available
How quickly money is needed