2.1.2 external finance (methods of finance)

Question 1

what is share capital?

Answer 1

selling your shares in your business to investors

Question 2

pros and cons of share capital

Answer 2

(+) large amounts of money can be accessed
(+) no interest
(-) loosing ownership
(-) only available to PLC’s

Question 3

what is venture capital?

Answer 3

venture capital is a form of private equity finance that is provided by venture capitalist to start-up and emerging companies that have been deemed to have high growth potential

Question 4

pros and cons of venture capitalist

Answer 4

(+) opportunity for expansion of the company
(+) can bring expertise and additional sources
(+) no obligation for repayment
(-) loose control of the business
(-) difficult to obtain

Question 5

what is an overdraft?

Answer 5

overdrafting is provided when businesses make payments from there current business account exceeding the available cash balance

Question 6

pros and cons of an overdraft

Answer 6

(+) flexible
(+) good for short-term funding
(-) interest rates are high
(-) banks can ask for repayments at any time

Question 7

what is a lease

Answer 7

obtaining the use of machinery, vehicles or other equipment on a rental basis

Question 8

pros and cons of a lease

Answer 8

(+) easier to upgrade equipment
(+) avoids the need to invest capital in equipment
(+) better liquidity
(-) more expensive than the purchase
(-) higher fixed cost per month

Question 9

what is trade credit

Answer 9

when a business buys raw materials, components, services or other goods from another business and will pay at a later date

Question 10

pros and cons of trade credit

Answer 10

(+) can generate revenue before having to pay
(+) good for new businesses
(+) no cash required upfront
(-) in long-term a leased asset is more expensive
(-) negative impact on credit rating

Question 11

what are government grants?

Answer 11

the government may provide financial help to businesses in some area of the company, in an effort to overcome unemployment

Question 12

pros and cons of government grants

Answer 12

(+) no interest
(+) don’t loose ownership
(-) difficult to get as there is a strict criteria