2.1.2 External Finance By Az

Question 1

What is external finance ?

Answer 1

External finance is capital raised from outside the business

Question 2

Name three sources of external finance?

Answer 2

Banks
Family and friends
Business Angels

Question 3

Name three methods of external finance?

Answer 3

Loans
Overdrafts
Leasing

Question 4

What is the advantage of using family and friends as a source of finance?

Answer 4

An advantage would be that repayment time can be flexible.

Question 5

What are the disadvantages of using family and friends as a source of finance?

Answer 5

Amount may be limited.

May place pressure on relationships.

Question 6

What is Peer-to-peer funding (P2P) ?

Answer 6

An individual lending you money whom you have no relationship or contact to.

Question 7

What are business angels?

Answer 7

Wealthy individuals that make a personal investment into the start up of the business for a share of the business.

Question 8

Why might it be a bad idea for a business angel to invest money into a new business?

Answer 8

It could be a bad idea as the business Angel would be investing their money into an un-established business.

Question 9

What is crowdfunding?

Answer 9

Crowdfunding involves raising finance from a large number of people and the amounts of money can vary.

Question 10

What are the advantages of loans?

Answer 10

Improves cash flow
Borrower retains ownership of the company.
Quick and easy to secure

Question 11

What are the disadvantages of loans?

Answer 11

Interest must be paid regardless of financial performance.

Can be charged a penalty for early repayments

Question 12

What is share capital?

Answer 12

Finance raised from sale of shares

Question 13

What are the advantages of share capital?

Answer 13

No interest repayments.

Only need to pay dividends if a profit is being made.

Possible solution to raise large amounts of finance.

Question 14

What are the disadvantages of share capital?

Answer 14

Loss of ownership as shareholders are part owners.

Risk of loss of control for a Plc which could lead to a hostile takeover.

Question 15

What is venture capital?

Answer 15

Investment from an established business for a share in the business

Question 16

What are the advantages of venture capital?

Answer 16

Expertise to help the business

Provides the required capital for expansion

Potential for large amounts of money to be invested

Question 17

What are the disadvantages of venture capital?

Answer 17

Loss of ownership

Risk of conflict and interferences

A long and complex process

Question 18

What is an overdraft?

Answer 18

An overdraft is the facility to overspend on a current account up to an agreed sum

Question 19

What are the advantages of using overdraft?

Answer 19

Quick and easy to arrange

Only borrowing when required allowing flexibility

Question 20

What are the disadvantages of overdrafts?

Answer 20

The bank can call it in at any time

Only available from a current bank account

Question 21

What is leasing?

Answer 21

Leasing is when a business pay a set amount in instalments to borrow an asset for pre determined period of time.

Question 22

What is trade credit?

Answer 22

Trade credit is paying suppliers after a period of time after the goods have already been received before payment.

Question 23

What are the advantages of trade credit

Answer 23

No interest payments

No loss of business ownership

Question 24

What are the disadvantages of trade credit?

Answer 24

No additional finale is being raised

You might have to pay more for the goods from the original price agreed due to later payment

Question 25

What is a grant?

Answer 25

Grants are fixed amounts of capital funded by the government

Question 26

What are the advantages of grants?

Answer 26

Doesn’t need to be repaid

No loss of business ownership

Improves cash flow

Question 27

What is a disadvantage of grants?

Answer 27

Have to meet a certain criteria to qualify for a grant