External finance(2.1.2)

Question 1

What is external finance?

Answer 1

finance sourced from outside the business

Question 2

Sources of external finance

Answer 2

family and friends
banks
peer to peer funding
business angels
crowdfunding
other businesses

Question 3

Family and friends-external finance

Answer 3

small business owners approach close acquaintances to invest in or lend money to a business

Question 4

Family and friends advantages-external finance

Answer 4

usually very cheap source of funds
may have no strings attached and can be provided on very flexible terms

Question 5

Family and friends disadvantages-external finance

Answer 5

relationships may be damaged if finance is not repaid

Question 6

Banks-external finance

Answer 6

banks provide several different types of loans to a business

Question 7

Banks advantages-external finance

Answer 7

may offer both short term finance and long term finance if a business qualifies
often keen to provide free advice and guidance to businesses that use their services
small sums may be borrowed from unsecured

Question 8

Banks disadvantages-external finance

Answer 8

business plan is usually required to access bank finance
can be cautious about lending to new untested businesses
interest (and often an arrangement fee) is payable
businesses must be customers of the bank to access some loans
for larger amounts businesses may need to provide security to be granted a loan

Question 9

What is peer to peer funding?

Answer 9

individuals with available savings pool it with others in a peer investment scheme

Question 10

Peer to peer funding advantages-external finance

Answer 10

loans ca usually be made available to businesses very quickly
usually has no strings attached

Question 11

Peer to peer funding disadvantages-external finance

Answer 11

borrowers are charged a small fee to access finance in this way and have to pay interest in the same way as a bank loan

Question 12

What is a business angel?

Answer 12

individuals who invest in a business in exchange for a stake in the business

Question 13

Business angels

Answer 13

specialise in making investments in start up or expanding businesses

Question 14

Business angel advantages-external finance

Answer 14

tend to be more willing to take a risk than banks
often offer advice and guidance to the business in which they invest
investment is usually for a determined period of time so owners regain shares in the future

Question 15

Business angels disadvantages-external finance

Answer 15

finding the right business angel can be challenging
as they own a stake in the business they may be involved in decision making and will receive a share of business profits

Question 16

What is crowdfunding?

Answer 16

finance provided by a large number of small investors on online platforms

Question 17

Crowdfunding advantages-external finance

Answer 17

creates an organic customer base and the platform provides a form of free marketing
a good credit rating is not required so new businesses that lack a trading record can attract funding

Question 18

Crowdfunding disadvantages-external finance

Answer 18

businesses need to provide a persuasive business plan to convince individuals to invest in their products as they will be competing with many other projects online
potential for negative publicity if the project is not successful in attracting enough crowdfunding capital

Question 19

Other businesses-external finance

Answer 19

may be possible for a business to access finance via a joint venture with another business
some large businesses buy shares in other companies as an investment or with the intention of a takeover

Question 20

Other businesses advantages-external finance

Answer 20

may provide access to business processes and market knowledge alongside finance
can access large amounts of finance

Question 21

Other businesses disadvantages-external finance

Answer 21

profits need to be shared between businesses
decisions will usually need to be agreed by all businesses

Question 22

Bank loans (mortgages and debentures)-methods of finance

Answer 22

bank loans are usually unsecured and typically repaid over two to ten years
mortgages are long term secured loans and typically used by a business to purchase buildings land or large items of capital equipment
debentures are long term agreements between a business and a lender to repay a specified amount (with a fixed rate of interest) by a certain rate

Question 23

Bank loan advantages-methods of finance

Answer 23

easy to access
cam pay in installments
business still has authority
interest is fixed

Question 24

Bank loan disadvantages-methods of finance

Answer 24

must pay interest
limited time to pay it back
depends on credit score
non current liability

Question 25

What is an overdraft?

Answer 25

an arrangement for business account holders to spend more money than it has in their account a limit is agreed and interest is charged only when a business goes overdrawn

Question 26

Overdraft advantage-methods of finance

Answer 26

short term source of finance tbat offers significant flexibility and aids cash flow

Question 27

Overdraft disadvantages-methods of finance

Answer 27

an overdraft may be called in if the bank is concerned about a business's ability to repay what it owes can carry significant interest

Question 28

What is share capital?

Answer 28

finance raised from the sale of shares in a limited company

Question 29

What are share holders?

Answer 29

owners of shares and they are entitled to a share of the companys profit when dividends are declared

Question 30

Share capital advantages-methods of finance

Answer 30

large amounts of capital can be raised especially by public limited companies interest is not payable on finance raised in this way

Question 31

Share capital disadvantages-methods of finance

Answer 31

shareholders have a say in the business e.g composition of the board of directors

Question 32

What is venture capital?

Answer 32

funds provided by specialist investors in small to medium sized businesses that have significant potential for growth e.g in the technology sector

Question 33

Venture capital advantages-methods of finance

Answer 33

businesses that may have been refused finance from other sources may be able to attract investment from less risk averse venture capitalists

Question 34

Venture capital disadvantages-methods of finance

Answer 34

venture capitalists usually require a stake in the business in return for finance and often expect to exert some control over the business

Question 35

What is leasing?

Answer 35

an asset such as a piece of machinery or a vehicle used by the business in return for regular payments e.g many businesses lease office equipment such as photocopiers and IT equipment

Question 36

Leasing advantage-methods of finance

Answer 36

business does not own the asset during the period of the lease and so is not responsible for maintenance and repair costs

Question 37

Leasing disadvantages-methods of finance

Answer 37

leasing is usually more expensive in the long run than buying an asset

Question 38

What is trade credit?

Answer 38

an agreement is made with suppliers to buy raw materials components and stock which are paid for at a later date typically 30 to 90 days

Question 39

Trade credit advantage-methods of finance

Answer 39

usually interest free

Question 40

Trade credit disadvantage-methods of finance

Answer 40

discount for early payment will not be available

Question 41

Grants-methods of finance

Answer 41

governments and industry may offer grants to businesses that meet specific criteria e.g grants may be available for businesses that create jobs or improve infrastructure in a region

Question 42

Grants advantage-methods of finance

Answer 42

doesnt need to be paid back

Question 43

Grant disadvantages-methods of finance

Answer 43

need to meet specific requirements hard to access