2.1.2 External finance Flashcards
What is a key advantage of using family and friends for external finance?
Cheaper source of funds
Family and friends often provide financial support with more flexible terms compared to formal lenders.
What are two benefits of obtaining finance from banks?
- Short term and long term options
- Banks provide advice and guidance
Banks can assist businesses not only with funding but also with strategic financial advice.
What is a characteristic of peer-to-peer funding?
Loans can be made available quickly
Peer-to-peer lending platforms often facilitate rapid loan approvals and disbursements.
How can other businesses contribute to external finance?
- potential Access to business processes
- Access to market knowledge
- Can access large amounts of finance
Partnering with other businesses can enhance operational capabilities and financial resources.
What is a benefit of working with business angels?
More willing to take a risk than banks
Business angels often invest in startups and emerging businesses that banks might consider too risky.
What is a unique advantage of crowdfunding?
name 3
- Creates an organic customer base
- Provides free marketing
- Good credit is not required
Crowdfunding not only raises funds but also engages potential customers early in the business process.
What is a potential disadvantage of seeking finance from family and friends?
Relationships may be damaged
Financial transactions can strain personal relationships if expectations are not met.
What is a requirement for obtaining a loan from banks?
Business plan is required
Banks typically require a well-structured business plan to assess the viability of the loan application.
What caution do banks exercise when lending?
Banks may be cautious about lending to risky businesses
Risk assessment is critical for banks to minimize default rates.
What are the costs associated with peer-to-peer lending?
Borrowers are charged a small fee and still have to pay interest
While generally more accessible, peer-to-peer lending can incur additional costs.
What is a disadvantage of financing through other businesses?
Profits need to be shared between businesses
Partnerships may dilute individual profit margins.
What is a challenge when working with business angels?
Finding the ‘right’ angel can be difficult
Investors may have specific preferences or industry expertise that complicates matching.
What is a concern when using crowdfunding?
- Need a persuasive business plan
- Potential for negative publicity
A strong pitch is crucial for success in crowdfunding, and failures can lead to public scrutiny.
Fill in the blank: Peer-to-peer funding offers a _______ arrangement.
‘no strings attached’ arrangement
This flexibility can attract borrowers who seek less restrictive terms.
What are the methods of finance?
- Loans
- Leasing
- Share capital
- Trade credit
- Venture capital
- Grants
- Overdrafts
Different methods have unique features and implications for businesses.
What is 2 negative of loans?
Interest depends on credit rating,Missed payments can negatively impact credit ratings.
What does leasing imply for a business?
Business does not own asset so is not responsible for maintenance and repair
Leasing can be more expensive in the long run.
What is a key advantage of share capital?
and one negative
Large amounts can be raised
however Shareholders have a vote in company decisions.
What is a positive of trade credit?
usaully Interest free
What is an advantage of venture capital and a disadvantage.
Less risk concerned investors however usaully require a stake in the business.
What distinguishes grants from other financing methods and a disadvantage.
Do not need to be repaid however Must be used for intended purpose.
What is a potential risk of overdrafts?
May be called in if bank is concerned and Higher interest rates may apply.
What are the implications of missed payments on loans?
Can lead to negative impact on credit rating
Timely payments are crucial to maintaining a good credit score.
How does leasing compare in cost over time?
More expensive in the long run so Businesses should consider long-term financial implications as leasing can usaully be seen as a short or mid term finance.
What is a disadvantage of share capital?
Shareholders have a vote
This can dilute control for original owners.
What is a disadvantage of trade credit?
No discounts for early payment as This might affect cash flow management.
What is a common requirement for venture capital?
Usually require stake in business
Investors often seek equity in exchange for funding.
What must grants be used for?
Intended purpose
Misuse of grants can lead to repercussions.
What is a potential consequence of overdrafts?
High interest rates
Businesses should monitor overdraft usage carefully.
