2.1.2 External Finance - sources of finance (1/2) Flashcards
External Finance
A source finance provider from outside the business
5 sources of finance
- family & friends
- Banks
- Peer 2 peer funding
- Business Angels
- Crowd Funding
Borrowing from friends and family
Money introduced into the business through the borrowing of friends and family
What type of businesses would borrow money from family & friends
Small & new businesses
- Private limited companies
Advantages of borrowing from friends and family -2
- Maybe willing to agree to payment as a flexible agreement with little/no interest
- Still keep control of your business
Disadvantages of borrowing from friends and family - 2
- 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
Banks are a common source of finance for all different types of business T/F
True
What type of methods of finance do Banks offer
Loans & overdrafts
Peer-2-Peer funding (P2P)
Where companies/individuals lend money to other individuals and businesses online
how does P2P funding work 3 steps
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)
What type of loans do the lenders in P2P offer
offer unsecured loans meaning there is no protection for the lenders
- therefore lender might lose their money if a borrower defaults
Peer -2 Peer advantages - 2
- 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
Peer -2 peer disadvantages - 1
P2P lenders will not deal with start-ups and new companies - as they don’t have an enough/good track record
Business Angels
Wealthy individuals who invest money into businesses that they think has the potential to be successful
These businesses tend to be new/innovative
What do business Angels ask for in return once they invest in a business
Ask for a share of the business
Business Angels are very knowledgeable and can give useful advice T/F
True
Advantages of Business Angels -1
they have a lot of business knowledge and can give you useful advice
Can help make your business very successful
Disadvantages of business Angels - 2
- 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.
Crowd Funding
Raising money from a large amounts of people usually via the internet
Who are the investors on the internet
What do these individuals do
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
How does the overall process of Crowd funding work
- 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
Advantages of crowd-funding - 2
- 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
Disadvantages of Crowd-funding -2
- 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
