2.1.2 External Finance - sources of finance (1/2)

Question 1

External Finance

Answer 1

A source finance provider from outside the business

Question 2

5 sources of finance

Answer 2

• family & friends
• Banks
• Peer 2 peer funding
• Business Angels
• Crowd Funding

Question 3

Borrowing from friends and family

Answer 3

Money introduced into the business through the borrowing of friends and family

Question 4

What type of businesses would borrow money from family & friends

Answer 4

Small & new businesses
- Private limited companies

Question 5

Advantages of borrowing from friends and family -2

Answer 5

• Maybe willing to agree to payment as a flexible agreement with little/no interest
• Still keep control of your business

Question 6

Disadvantages of borrowing from friends and family - 2

Answer 6

• Amount of money that maybe available may be only a small amount
• Could place a strain on relationships if there is payment conflict e.g on time

Question 7

Banks are a common source of finance for all different types of business T/F

Answer 7

True

Question 8

What type of methods of finance do Banks offer

Answer 8

Loans & overdrafts

Question 9

Peer-2-Peer funding (P2P)

Answer 9

Where companies/individuals lend money to other individuals and businesses online

Question 10

how does P2P funding work 3 steps

Answer 10

Lenders say how much they are willing to lend & indicate what sort of interest rate they want

Borrowers say how much they want to borrow, why and how long for

Lending company then assesses how risky borrower is then and then matches with appropriated lending (more riskier borrowers are charged with higher interest rates)

Question 11

What type of loans do the lenders in P2P offer

Answer 11

offer unsecured loans meaning there is no protection for the lenders

• therefore lender might lose their money if a borrower defaults

Question 12

Peer -2 Peer advantages - 2

Answer 12

• usually have a lower interest rate than a bank loan so is cheaper
• it’s an unsecured loan so therefore individuals don’t have to give up their own individuals assets

Question 13

Peer -2 peer disadvantages - 1

Answer 13

P2P lenders will not deal with start-ups and new companies - as they don’t have an enough/good track record

Question 14

Business Angels

Answer 14

Wealthy individuals who invest money into businesses that they think has the potential to be successful

These businesses tend to be new/innovative

Question 15

What do business Angels ask for in return once they invest in a business

Answer 15

Ask for a share of the business

Question 16

Business Angels are very knowledgeable and can give useful advice T/F

Answer 16

True

Question 17

Advantages of Business Angels -1

Answer 17

they have a lot of business knowledge and can give you useful advice

Can help make your business very successful

Question 18

Disadvantages of business Angels - 2

Answer 18

• Difficult & time consuming trying to find a ‘suitable’ business Angel willing to invest (read blue book pg 154)
• they want a share of the business meaning that some control and decision making may be given up.

Question 19

Crowd Funding

Answer 19

Raising money from a large amounts of people usually via the internet

Question 20

Who are the investors on the internet

What do these individuals do

Answer 20

These investors are large number of individuals who collectively represent the crowd

each individual only contributes a small amount & then collectively enough can be raised to meet target

Question 21

How does the overall process of Crowd funding work

Answer 21

• a business puts details of a new idea that they need funding for onto a crowd funding website e.g (KICKSTARTER)
• These details are made public so anyone can see them & contribute to the funding

Question 22

Advantages of crowd-funding - 2

Answer 22

• businesses raise awareness of it’s products on the crowdfunding website- may increase sales, even from ppl who choose not to contribute
• Cheap (no interest/repayments) and easy to set up

Question 23

Disadvantages of Crowd-funding -2

Answer 23

• Not always reliable and suitable to raise large amounts of money
• Details of the business is made public so the business idea may actually get copied