External Finance (2.1.2) Flashcards
What is external source of finance?
When the finance comes from outside the business
What are the 6 Sources of Finance?
-Friends +Family
-Banks
-Peer-to Peer funding
-Business Angels
-Crowdfunding
-Other businesses
What are the 7 Methods of Finance?
-Loans
-Share Capital
-Venture Capital
-Overdrafts
-Leasing
-Trade Credit
-Grants
What is the source of finance Family and Friends?
When small business owners approach close acquaintances like family and/or friends to invest in or lend money to a business
What are the advantages of using Family and Friends as a source of finance?
-Quick + Easy
-Access to large sums
-Keep up with trends
-cheap source of funds
-can have flexible terms of paying back
What are the disadvantages of using Family and Friends as a source of finance?
-Could be limited
-Giving up equity
-Loss of control
-relationships may be damaged
What is the source of finance Banks?
Banks provide several different kinds of loans to businesses. Could be borrowing of loans, overdrafts or credit
What are the advantages of using Banks as a source of finance?
-Quick + Easy
-Access to large sums
-Keep up with trends
-Banks can provide free advice or guidance
What are the disadvantages of using Banks as a source of finance?
-Interest Repaid
-Cash Flow worries
-Large Sums owned
-Business plan usually required
-Can be cautious about lending to new, untested businesses
What is the source of finance Peer-to-Peer?
Borrowing of loans from individuals with available savings who pool with others in a peer investment scheme such as a funding circle
What are the advantages of using Peer-to-Peer as a source of finance?
-Quick + Easy
-Access to large sums
-Keep up with trends
-Usually has no strings attached
What are the disadvantages of using Peer-to-Peer as a source of finance?
-High interest repaid
-Cash flow worries
-Large sums owed
What are business angels as a source of finance?
Investment from wealthy investors who specialise in making investments in start-up or expanding businesses e.g. Dragons Den investors
What are the advantages of using business angels as a source of finance?
-Access to large sums
-Expertise
-Keep up with trends
-Business angels more willing to take a risk
-Angels often offer advice and guidance to the business they invest in
What are the disadvantages of using business angels as a source of finance?
-Giving up equity
-Large sums owed
-Loss of control
-Allow them to be involved in decision-making
What are other businesses as a source of finance?
May be possible for a business to access finance via a joint venture with another business
What are the advantages of using other businesses as a source of finance?
-May provide access to business processes and market knowledge alongside finance
-Can access large amounts of finance
What are the disadvantages of using other businesses as a source of finance?
-Profits need to be shared between businesses
-Decisions will usually need to be agreed by all businesses
What is Crowdfunding as a method of finance?
Large number of small investors on online platforms
What are the advantages of using Crowdfunding as a method of finance?
-Adds up to large sums
-No repayment
-Keep up with the trends
-Good credit rating not required
What are the disadvantages of using Crowdfunding as a method of finance?
-Risk reputation damage
-Need strong values
-Competitive
-Need to have a persuasive business plan as compete with many other projects
What are Loans?
Type of credit vehicle in which a sum of money is lent to another party in exchange for future repayment of the value or principle amount. Interest is also added to the principal value which must be paid in addition
What is Share Capital?
Its a funding of a company through issuing common or preferred stock
What is Venture Capital?
Form of private equity and a type of financing that investors provide to startup companies and small businesses that are believed to have a long-term growth potential. Generally comes from well-off investors, investment banks and any other financial institutions
What is an Overdraft?
Occurs when there isn’t enough money in an account to cover a transaction or withdrawal, but the bank allows the transaction to occur. Extension of credit granted when an account reaches zero.
What is Leasing?
Type of Asset finance that allows firms or individuals to possess and control an asset during an agreed term, while paying rent or installments covering depreciation of asset and interest to cover capital cost
What is Trade Credit?
An agreement made between two businesses that allows one business (customer) to purchase goods or services from another (supplier) without paying cash up front, and instead pay at a later date
What are Grants?
Payments provided by either the Government or a private organization for a specific purpose, such as training, expansion or R+D. You don’t have to pay it back so differs from ever other form of finance.
