External finance

Question 1

what is external finance

Answer 1

finances obtained from sources outside the business

Question 2

list the 7 types of external finance

Answer 2

issue of shares
bank loans
debentures
debt factoring
grants and subsidies 
micro-finance
crowd funding

Question 3

explain issue of shares

Answer 3

finance obtained when shares are sold and only applies to limited companies

Question 4

what is a bank loan

Answer 4

is money borrowed from the bank

Question 5

what is meant by debentures

Answer 5

these are long term loan certificates issues by companies; similar to shares in the sense that people buy them and they are similar to loans in the sense that they must be paid back and interest is charged

Question 6

what a grants and subsidies

Answer 6

these are grants given by government agencies or other external sources

Question 7

what is known as micro-finance

Answer 7

special institutes are set up in poorly developed countries where financially lacking people are looking to start or expand a small business and are given small sums of money. these institutes provide all sorts of financial services

Question 8

what is crowd-funding

Answer 8

a way of raising large sums of capital from small groups of people e.g. Kickstarter and these funds are donated voluntarily

Question 9

what is debt-factoring

Answer 9

this is when businesses ask debtors (people who owe money to the business) to pay back for goods they purchased from the business; debt factors are specialist agents who collect the business’ debt from debtors

Question 10

issue of shares: ads and disads

Answer 10

Ads:

• permanent source of finance
• doesn’t need to be payed back
• no interest is charged

Disads:

• if many shares are bought ownership of the business can change; the owner with the larger share has the most control
• dividends need to be payed to owners

Question 11

bank loans: ads and disads

Answer 11

Ads:

• quick to arrange a bank loan
• can be for different lengths of time
• large businesses can be charged low interest rates

Disads:

• interest is charged
• needs to be payed back/repaid
• bank requires collateral security

Question 12

debentures: ads and disads

Answer 12

Ads:
-very good for raising long term finance e.g. 25 years

Disads:

• it need to be paid back
• interest is charged

Question 13

debt-factoring: ads and disads

Answer 13

Ads:

• immediately/readily available finance for the business
• business does not have to handle debt collecting

Disads:
-debt-factors/ specialist agency will get a certain percent of debt they are collecting for said business and said business will not get 100% of their debt

Question 14

grants and subsidies: ads and disads

Answer 14

Ads:

• is not repaid
• free

Disads
-certain conditions have to be met by business such as relocating to an under-developed area