Edexcel-External finance 2.1 Flashcards
External
Sourced outside the business
Family and friends
Small businesses approach close acquaintances to invest or lend money.
Family and friends advantages
Cheap source
Beneficial for both if it’s just a share of business
Family and friends disadvantages
Relationships may be damaged
Banks
Provide several type of loans
short term loans and finances examples
Overdrafts
Long term loans and finances examples
Loans or mortgages
Banks advantages
Can provide free advice
Can offer both short and long time finances
Banks disadvantages
Interest is added
A plan is usually required
Peer to peer funding
Individuals with available savings pool it in with others in a peer investment scheme.
Peer to peer funding advantages
Loans made quickly
Share of business is good as no strings attached
Peer to peer funding disadvantages
Charged small fee and interest as compensation
Business Angels
Some individuals specialise in making investments in start-up or expanding businesses
Business Angels examples
Dragons Den investors
Business Angels advantages
Tend to be more willing to take a risk
Owners regain shares in the future
Business Angels disadvantages
Finding the right angel with experience can be difficult
Involved in decision making
Crowd Funding
Allows businesses to access finance provided by a large number of small investors on online platforms
Crowd Funding e.g.
Kickstarter
Crowd Funding advantages
Provides a form of free marketing
A good credit score is not required so new businesses can get the funding
Crowd Funding disadvantages
Persuasive business plan needed to beat competitors
Potential negative reputation if business can’t attract crowd funding.
Other businesses
Joint ventures with other businesses
Large businesses buy shares
Other businesses examples
Owner of sports direct bought shares of debenhams and eventually took over
Other businesses advantages
Access business and market knowledge
Access Large amounts of finance
Other businesses disadvantages
Profits need to be shared
Decisions need to be agreed by all businesses
Loans
A sum of money borrowed and repaid with interest.
Loans advantages
Interest rates are fixed
Repayments made in equal instalments
Loans disadvantages
Fail to repay assets taken.
increase gearing.
Examples of loans
Mortgages
Debentures
Overdrafts
Arrangement to spend more money than in the account
Overdrafts advantages
Aids cash flow
Offers flexibility
Overdrafts disadvantages
May be cancelled
still have to pay fee of interest
Share capital
Finance raised from the sale of shares
Share capital advantages
Large amounts of capital raised
Interest not payable
Share capital disadvantages
Share holder involved in decisions
Venture capital
Funds provided by specialist investor
Venture capital advantages
Easy way to attract investments
Venture capital disadvantages
Usually require a stake in the business and have some control
Leasing
Regular payments for equipment
Leasing advantages
Business does not own the asset
Leasing disadvantages
More expensive in the long run
Trade credit
Agreement to buy stock which are paid at a later date
Trade credit advantages
Interest free
Trade credit disadvantages
Discounts not available
Grants
Governments and trusts may offer grants
Grants advantages
Grants do not need to be repaid
Grants disadvantages
Businesses have to use finances for intended purpouse
