external finance Flashcards
what source of finance is common for small businesses
friends and family
pros of family and friends as a source
low or zero interest rates
unlikely to want a stake in the business
cons of family and friends as a source
if not paid back in full or on time may lead to strains on relationships
what sources of finance do banks provide
loans
mortgages
overdrafts
what is usually necessary to show a bank to apply for a source of finance
a business plan
what is a mortgage
they usually last around 25 years and can oly be used to buy a specific asset. interest rates can be fixed or variable
what is a bank loan
the amount borrowed can be spread over a period to match the needs of the business as well as allowing the business to budget more effectively
what is an overdraft
a flexible source of finance mainly used to ease short-term cash flow problems.
what business is an overdraft well suited for
one with seasonal sales
what are the 2 types of loans
unsecured and secured loans
define secured loan
a loan where the lender requires security such as property to provide protection in case the borrower defaults
define unsecured loan
where the lender has no protection if the borrower fails to repay the money owed
what else might banks offer
advisory services to businesses
what is peer to peer lending
involves people lending money to unrelated individuals and so avoiding using a bank.
where do transactions occur for P2PL
online and are organised by specialists like zopa, funding circle, lending works and ratesetter
what are key features of P2PL
-all loans are unsecured
-the whole financial arrangment is for profit
-all transactions online
-no previous relatioship between lender and borrower needed
-lenders may choose borrowers
-P2P sites usually charge a fee
pros of P2PL
better interest rates offered than by a bank
convenient as its quick
cons of P2PL
the financial services compensation scheme doesnt cover participants.
for lenders access to cash may not be instant
what are business angels
individuals who tyically invest between 10,000 and £100,000+ in exchange for a stake in the business
when are most business angel ivestments made
in the start up of a business or early stages of expansion
reasons people become business angels
like the idea of risks
tax relief offered by government
investment opportunities for unused incomec
cons of business angels
need to share interests and want the firm to go in the same direction
may be pressurisingat
what must business directors do for a business angels
present a compelling business proposition concisely and succinctly
what is crowd funding
where a large number of individuals invest in a business or project on the internet, avoiding a bank
whats a debenture
a loan agreement in writing between a borrower and a lender that is registered at Companies House. It gives the lender security over the borrower’s assets
whats a debt factor
where a business sells a debt to someone else and pays a fee for that person to collect it on their behalf
