3- External Finance (SOURCES of Finance) Flashcards
What is external finance?
Money raised from sources outside the business
What are the sources of external finance?
Family and friends
Banks
Peer to peer lending
Business angels
Crowd funding
Other businesses
Family and Friends
Particularly common for small businesses
What are the advantages of family and friends?
- cheap - it’s a loan so interest rates are low (possibly 0)
- they may not want ownership in the business
What are the disadvantages of family and friends?
- serious issues if loans can’t be repayed or terms of agreement are unclear, can lead to loss of friendship/family breakdown
Banks
Include loans , overdraft, mortgages
Bank account required to facilitate transactions with customers or suppliers
What are the advantages and disadvantages of banks?
Advantage : might offer free advisory services for businesses
Disadvantage: charge interest rates on all types of loans
Peer-to-peer lending
People offering money to unrelated individuals a.k.a ‘peers’, avoiding use of banks, can be done online
What are the advantages of peer- to-peer lending?
- interest better for both borrowers and lenders
- convenient as can be done entirely online —-> no previous relationship between lenders and borrowers needed
What are the disadvantages of peer to peer lending?
- all loans unsecured —> no protection for lenders
Therefore if loan can’t be repayed lenders won’t get their money back
Business angels
Individuals who may give 10,000 to 100,000 in exchange for a stake in the business
Maybe because they like the excitement and risk involved
What are the advantages of business angels ?
May be demanding individuals with considerable views of how to achieve high profit from targeted business
Must present a clear and compelling business proposition
What are the disadvantages of business angels ?
Owners must get comfortable sharing profits with angel
Angels may take time choosing targets for investment
Finding a suitable angel as they must have shared interests and common vision for firms future
Crowd funding
Similar to peer-to-peer
Can lend money without previous knowledge of them
Lenders and investors will be large numbers of individuals collectively representing a ‘crowd’ (also done online)
What are the advantages of crowd funding?
Conducted online so it’s convenient
Administrated by a crowd funding specialist
What are the disadvantages of crowd funding?
Business idea may be stolen as it’s done online
Other businesses
Sometimes businesses set up a joint venture where they share costs , finance and profits of a specific venture
