External Finance (2.1.2)

Question 1

What is external source of finance?

Answer 1

When the finance comes from outside the business

Question 2

What are the 6 Sources of Finance?

Answer 2

-Friends +Family
-Banks
-Peer-to Peer funding
-Business Angels
-Crowdfunding
-Other businesses

Question 3

What are the 7 Methods of Finance?

Answer 3

-Loans
-Share Capital
-Venture Capital
-Overdrafts
-Leasing
-Trade Credit
-Grants

Question 4

What is the source of finance Family and Friends?

Answer 4

When small business owners approach close acquaintances like family and/or friends to invest in or lend money to a business

Question 5

What are the advantages of using Family and Friends as a source of finance?

Answer 5

-Quick + Easy
-Access to large sums
-Keep up with trends
-cheap source of funds
-can have flexible terms of paying back

Question 6

What are the disadvantages of using Family and Friends as a source of finance?

Answer 6

-Could be limited
-Giving up equity
-Loss of control
-relationships may be damaged

Question 7

What is the source of finance Banks?

Answer 7

Banks provide several different kinds of loans to businesses. Could be borrowing of loans, overdrafts or credit

Question 8

What are the advantages of using Banks as a source of finance?

Answer 8

-Quick + Easy
-Access to large sums
-Keep up with trends
-Banks can provide free advice or guidance

Question 9

What are the disadvantages of using Banks as a source of finance?

Answer 9

-Interest Repaid
-Cash Flow worries
-Large Sums owned
-Business plan usually required
-Can be cautious about lending to new, untested businesses

Question 10

What is the source of finance Peer-to-Peer?

Answer 10

Borrowing of loans from individuals with available savings who pool with others in a peer investment scheme such as a funding circle

Question 11

What are the advantages of using Peer-to-Peer as a source of finance?

Answer 11

-Quick + Easy
-Access to large sums
-Keep up with trends
-Usually has no strings attached

Question 12

What are the disadvantages of using Peer-to-Peer as a source of finance?

Answer 12

-High interest repaid
-Cash flow worries
-Large sums owed

Question 13

What are business angels as a source of finance?

Answer 13

Investment from wealthy investors who specialise in making investments in start-up or expanding businesses e.g. Dragons Den investors

Question 14

What are the advantages of using business angels as a source of finance?

Answer 14

-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

Question 15

What are the disadvantages of using business angels as a source of finance?

Answer 15

-Giving up equity
-Large sums owed
-Loss of control
-Allow them to be involved in decision-making

Question 16

What are other businesses as a source of finance?

Answer 16

May be possible for a business to access finance via a joint venture with another business

Question 17

What are the advantages of using other businesses as a source of finance?

Answer 17

-May provide access to business processes and market knowledge alongside finance
-Can access large amounts of finance

Question 18

What are the disadvantages of using other businesses as a source of finance?

Answer 18

-Profits need to be shared between businesses
-Decisions will usually need to be agreed by all businesses

Question 19

What is Crowdfunding as a method of finance?

Answer 19

Large number of small investors on online platforms

Question 20

What are the advantages of using Crowdfunding as a method of finance?

Answer 20

-Adds up to large sums
-No repayment
-Keep up with the trends
-Good credit rating not required

Question 21

What are the disadvantages of using Crowdfunding as a method of finance?

Answer 21

-Risk reputation damage
-Need strong values
-Competitive
-Need to have a persuasive business plan as compete with many other projects

Question 22

What are Loans?

Answer 22

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

Question 23

What is Share Capital?

Answer 23

Its a funding of a company through issuing common or preferred stock

Question 24

What is Venture Capital?

Answer 24

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

Question 25

What is an Overdraft?

Answer 25

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.

Question 26

What is Leasing?

Answer 26

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

Question 27

What is Trade Credit?

Answer 27

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

Question 28

What are Grants?

Answer 28

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.