External finance 2.1.2 Flashcards
What is external finance?
Sourced from outside the business
Family and friends
- Approaching close acquaintances to invest in or lend money to a business
Advantages and disadvantages of friends and family
+ Cheap
+ Flexible terms
- Relationships may be damaged
Banks
Banks provide several different kinds of loans to businesses such as loans , overdrafts and mortgages
Advantages and disadvantages of banks
+ Offer both short and long term finance
+ Often keen to offer free advice
- A business plan is usually required
- Maybe cautious when lending to new businesses
- Interest is payable
- Security needs to be provided against larger borrowings
Peer-to-peer funding
Allow individuals to lend money to businesses
Advantages and disadvantages of P2P lending
+ Usually no strings attached
+ Loans can be made available
- Interest needs to be paid
Business angels
Wealthy individuals who invest money into new or innovative businesses that they think have potential to be successful.
Advantages and disadvantages of business angels
+ Tend to be more willing to take risks than banks
+ Often offer advice and guidance
- Trying to convince an angel to invest may be time-consuming
- A share of the business has to be given up so get involved in decision-making and receive a share of profits
Crowdfunding
Raising money from a large number of people - typically each person only contributes a small amount but collectively enough is raised
Advantages and disadvantages of crowdfunding
+ Raises awareness of its product which may increase sales
- Risk ideas may be copied
- Businesses need to provide a persuasive business plan to convince individuals to invest in their product as they will be competing with many other projects online
Other businesses
A business with a large retained profit might want to invest in another business.
