2.1.2 External finance Flashcards
defintion external finance
investment for the business that is obtained from outside of the business e.g. banks, investors
definition of source of finance
where the money has come from e.g. bank
defintion method of finance
use of a finance /how a business raises capital
sources of finance
bank
friends+family
angel investors
peer-to-peer funding
crowd funding
other businesses
friends and family
ltd companies are able to raise finance by selling shares to friends and family
sole trader/partnership –> interest, share of profit
+/- friends and family
+ loans maybe offered without security and at lower rates and longer terms
+ unlikely to need business plan
- may cause tension + problems if finance not repaid
–> may demand their money back at higher rates
banks
lend a loan to a business to start or grow and expand
provide overdraft to help when cash flow problem
(high street banks –> business department deal with commercial loans)
+/- Banks
+ lend without %of owvership
+ owner retains conrtrol of business
- bank loans expensive –> pay back on time
- hard for new business owner to obtain loan –> no historical data
- owner may need use own capital as security e.g. collateral e.g. car
peer to peer funding
lending market places e.g. Funding Circle –>gained trust of customer by offering lower rates than banks
matches businesses that need finance with investors who are lloking for a good return on their investment
+/- peer to peer funding
+ get access to funding within 1 week once approaved
+ business owners can apply online
+ investors expect returns of 6-7% and savings might only give them 3%
- classifiey as private business loans –> money comes from several small business investors
–> if not enough investors interested –> not able to acquire entire amount that business needs
business angels
offers lend their own disposible finance
take shares in retun for finance
money to grow + skills expertice knowledge
seek return of investment over 3-8 years
lower loan amounts than a venture capitalist
+/- business angels
+ investment decisions quickly
+ access to investors knowledge and skills
+ acces to mentoring or management
+ no repayments or interest on money lend
- not sustainable for investments under 10K or more than 500K
- owner needs to give up share of business
crowdfunding
=large number of people fund a project over internet making small investments each
3 ways: Donate (no money back but e.g. newslettre), Lend (get money back with interest), Invest ( exchange for equity or share –> may increase)
+/- crowdfunding
+ alternative to loan for small businesses
+ can be obtained without paying upfront fees
+ generate funds & promote business
- need to show case idea to investors & may need to make video and other promotions to attract investors
other businesses
invest in start-ups
business may have surplus profit and view thsi as a way to get a good return on their investment
usually tech or It businesses
methods of finance overview
loan
grant
share capital
venture capital
overdraft
leasing
trade credit
loan
money from a bank
quick to set up
loans are affected by interest rates
may lend to smal businesses but not start-up because no track record of making money
+/- loan
+ loan tired for ertain length of time –> business owner can plan ahead and know when repayments need to be and when they leave the bank account
+not ask fot % of business
+ straight - forward process
- charge interest on loan
- not flexible (may incur penalty if decide to settle loan early)
- bank aksks for security/collateral on loan
share capital
in PLC (floated on stock market) they can raise more finance by having an ordinary share issue
this is an external long term method of finance but would only apply to a large business that is PLC
+/- share capital
+ investors are often willing to provide extrafunding as the business grows
+more cost effective way - no interest
+ finance is based on acquiring more equity rater than getting further into debt
- potential investors need a lot of background information before they buy share
- the more shares are sold - the more profit must be divided up and paid out to investors as dividents
- expensive and slow process to organise
venture capital
VCs will invest large sums of other people’s money in a business in return for a share in the company
typically at least 50k in small business (up to 1 Mil)
they look for a high rate of return in a specific period of time
+/- venture capital
+ large amount of money in a short period of time
+ business gets skills of VC & their network and links may increase revenue
+ great for owners who have been refused a loan
- VC want share in business
- look for strong business plan, sound management, proven track record, –> difficult for start-up to attract vc without right credentials
overdraft
extra cash to tide over until a better month
organized by bank which is for short period of time lending small amount of money
once arranged –> can be spend
+/- overdraft
+ quick method for difficult trading month
+ easily arraged (on phone, online)
+ only pay interest on money they are borrowing
+ as soon as trading better –>pay back easily so interest charges will stop
- if business goes over this amount –> unauthorised –> charged a fine
- very expensive (high interest rates)
- not suitable for large amount of money over long period of time
leasing
as business grows –> need more vehicles or equipment
lease - equipment can be regularly updated and spread the cost
business never own equipment (get option to change it when it needs updating)
+/- leasing
+ lower monthly cost than loan
+ often leasing without any advanced fees
+ leasing firm will maintain the equipment –> always reliable working equipment
- leasing is often oer a fixed term –> contracts difficult to get out
trade credit
when trading with another business –> need to buy goods with credit
seller gives buyer: 30,60,90 days to pay
buyer has time to sell gods in their own shop before paying back
may igve discount when using cash)
+/- trade credit
+ business can sell goods before need to repay
+ no interest
+ pay regularly —> secure better deals
- not all stock available with this method
- if business doesnt repay in time they risk being refused further credit in future
grant
uk government provides financial help to overcome problems of funding
doesn’t have to be repaid & owner keeps control
+/- grant
not pay back grant
+ no interest
+ get funds without loss of controll
- difficult –> suits specific project
- a lot of competition
- match the funds they are awarded
- usually for proposed projects not ones that have already started
- complex and time-consuming
