Chapter 27- External Finance Flashcards
Sources of finance
Family and Friends Banks Peer-peer lending Business Angels Crowd funding
Family and Friends
Particularly for small businesses – cheap source as there is likely to be zero interest on the loan – they are likely not to want a stake in the business and will not interfere in the running of the business.
Banks
Commercial banks such as Barclays, Natwest, Lloyds and HSBC provide a range of different external funding arrangements for businesses – these include loans, overdrafts and mortgages – most commercial banks have specialist departments or staff that deal exclusively with businesses – these are often free
Peer-peer lending
Involves people lending money to unrelated individuals or peers and therefore avoiding the use of a bank – transactions are undertaken online and are organised by specialists such as zopa, funding circle, lending works and RateSetter.
- All loans are unsecured which means there is no protection from
lenders
- The whole financial arrangement is conducted for profit
- All transactions take place online
- No previous knowledge or relationship between lenders and
borrowers is needed
Business angels
Business angels are individuals who typically may invest between £10,000 and £100,000 often in exchange for a stake in the business – An angel might make one or two investments in a three-year period, either individually or together with a small group of friends, relatives or business associates.
Crowd funding
Similar to peer-peer funding in that banks are excluded and individuals can lend money to others without previous knowledge of them
– however the fundraisers tend to be businesses or groups who are involved in a particular venture such as staging a production, building a school or setting up a community project
11 Methods of finance
Unsecure loans Secure loans Debenture Issued share capital Capital gain Venture capitalism Lease Trade credit Grants Permanent capital
Unsecure loans
Means that the lender has no protection if the borrower fails to repay the money owed
Secure loans
a loan where the lender requires security such as property – mortgages are secure loans
Debenture
Longer term loan to a business, the must be repaid at a set date
Authorised Share capital
maximum amount that can be legally raised
Capital Gain
The profit made from selling a share for more than it was bought
- Ordinary shares: also called equities and most common type of
share issued – no guaranteed dividend - Preference shares: the owners of these shares receive a fixed rate
of return when a dividend is declared – they carry less risk
because shareholders are entitled to their dividend before the
holders of ordinary shares - Deferred shares: not used often – they are usually held by the
founders of the company – deferred shareholders only receive a
dividend after the ordinary shareholders have been paid a
minimum amount.
Venture capitalism
Providers of funds for small to medium sized companies that may be considered too risky for other investors
- They invest in businesses after the initial start-up and often prefer
technology companies with high growth potential - They prefer to take a stake in the company, which means they
have some control and are entitled to a share of the profit
Lease
A contract to acquire the use of resources such as property or equipment in return for regular payments
Advantages
- No large sums of money are needed to buy the use of equipment
- Maintenance and repair costs are not the responsibility of the user
- A leasing agreement is generally easier for a new company to
obtain than other forms of loan finance
Disadvantages
- Over a long period of time leasing is more expensive than the
outright purchase of plant and machinery
- Loans cannot be secured on assets which are leased
Trade Credit
It is common for businesses to buy raw materials etc. and pay for them at a later date interest free – particularly profitable during period of inflation
