2.1.2 External methods of finance Flashcards
What are the external methods of finance?
7
- Loans
- Share capital
- Venture capital
- Overdrafts
- Leasing
- Trade credit
- Grants
What are the pros of a loan?
2
- Certainty of fund, easy to plan
- Flexible to firms situation (instalments or end of loan)
What is the main con of a loan and what term is it?
2
- Risky businesses excluded
- Short term
What is share capital?
1
- Limited company can sell its shares to investors who become shareholders
What are the pros of share capital?
3
- No repayment
- Dividends can be cut, flexibility
- Wise heads into the boardroom
What are the cons of share capital?
2
- Give away equity
- Investors expect ^return as risk they’re exposed to if business goes bankrupt
What is venture capital?
1
- Provide finance in ^risk investments, mostly through combo of loans and shares (like business angel)
What is the difference between a venture capitalist and business angel?
1
- Capitalist = belong to company
- Angel = rich individual
What is an overdraft and what term is it?
2
- Facility allows company to spend up to agreed - balance
- Short term
What are the pros of an overdraft?
2
- Easy to arrange
- Flexible (use for up and down cash flow)
What are the cons of an overdraft?
3
- ^Interest than bank loan
- 24hr recall, taken back at any time (unable to pay - balance, administration)
- Interest fluctuates w rates
What is leasing and what term is it?
2
- Alt to buying asset outright, rented for monthly fee for set period of time
- Medium term
What are the pros of leasing?
2
- No large cash outflow
- Leasing company may be responsible for repairs
What are the cons of leasing?
2
- Over time can be ^expensive
- Assets not owned by firm
What is trade credit and what term is it?
2
- Where G/S provided by supplier aren’t paid for immediately
- Short term
