2.1.2 External finance

Question 1

defintion external finance

Answer 1

investment for the business that is obtained from outside of the business e.g. banks, investors

Question 2

definition of source of finance

Answer 2

where the money has come from e.g. bank

Question 3

defintion method of finance

Answer 3

use of a finance /how a business raises capital

Question 4

sources of finance

Answer 4

bank
friends+family
angel investors
peer-to-peer funding
crowd funding
other businesses

Question 5

friends and family

Answer 5

ltd companies are able to raise finance by selling shares to friends and family
sole trader/partnership –> interest, share of profit

Question 6

+/- friends and family

Answer 6

+ 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

Question 7

banks

Answer 7

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)

Question 8

+/- Banks

Answer 8

+ 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

Question 9

peer to peer funding

Answer 9

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

Question 10

+/- peer to peer funding

Answer 10

+ 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

Question 11

business angels

Answer 11

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

Question 12

+/- business angels

Answer 12

+ 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

Question 13

crowdfunding

Answer 13

=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)

Question 14

+/- crowdfunding

Answer 14

+ 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

Question 15

other businesses

Answer 15

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

Question 16

methods of finance overview

Answer 16

loan
grant
share capital
venture capital
overdraft
leasing
trade credit

Question 17

loan

Answer 17

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

Question 18

+/- loan

Answer 18

+ 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

Question 19

share capital

Answer 19

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

Question 20

+/- share capital

Answer 20

+ 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

Question 21

venture capital

Answer 21

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

Question 22

+/- venture capital

Answer 22

+ 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

Question 23

overdraft

Answer 23

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

Question 24

+/- overdraft

Answer 24

+ 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

Question 25

leasing

Answer 25

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)

Question 26

+/- leasing

Answer 26

+ 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

Question 27

trade credit

Answer 27

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)

Question 28

+/- trade credit

Answer 28

+ 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

Question 29

grant

Answer 29

uk government provides financial help to overcome problems of funding
doesn’t have to be repaid & owner keeps control

Question 30

+/- grant

Answer 30

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