External finance Flashcards
What is crowdfunding?
-Raising finance from a large amount of people who each contribute.
-Long term finance, external finance, start-up and new businesses.
What are the pros of crowdfunding?
-No repayment to be made
-Better than debt (lower costs)
-Excellent exposure, social media attention etc
-Good feedback
What are the cons of crowdfunding?
-If profits are made they will be shared
-If it fails then the reputation of the founder/business will be damaged
-Investors may have limited experience
What is a bank loan?
When a business borrows a sum of money and pays it back with interest over an agreed period of time.
-Long term finance, external finance, start ups or established growth.
What are pros of a back loan?
-Common tool for expansion
-Keep control
-Tends to business needs
-Advice
-Frequent payment back may improve credit score
What are cons of a bank loan?
-Assets will be taken if you fail to repay, limited liability
-No flexibility and must stick to payment terms
-Fail to pay = worse credit score, less likely to get future loans and will have higher future interest rates
What is share capital?
-When a limited company issues shares in exchange for payment = shareholders.
-Long term, external and established business.
What are the pros of share capital?
-No interest
-Opportunity to raise large amounts of capital
-Employee incentive = profit sharing
What are the cons of share capital?
-Give up share of business
-Need to pay shareholders dividends = conflict if low profit
What is venture capital?
A type of finance offered to ‘high risk, high reward’ firms in exchange for a share in the business.
-Long term, external, start-up/new businesses.
What are pros of venture capital?
-Makes expansion possible
-No repayment
-Reduce personal (founder) risk
-Venture capitalist has expertise
What are cons of venture capital?
-Given up share of business
-May lose some control of decisions and business
-Venture capitalist is ultimately going to exit and wants money.
What is trade credit?
When you buy raw materials or components from suppliers one day but pay later (30-60 days).
-New/start-up, short term, external.
What are pros of trade credit?
-Simple to arrange and maintain if credit terms are met.
-Cheap form of short term finance.
-No control of the business is given up.
What are cons of trade credit?
-Risk of ruining relationships with suppliers if credit terms are not met which could have long-term consequences
-Large fine if you pay late
