External sources Flashcards
External sources
sources of money from outside the business.
Bank loan
business borrows a lump sum of money which will have to be repaid over time with interest
bank loans: advantages
- repayments are in instalments
- makes cash flow easier
- don’t have to issue shares
bank loans: disadvantages
- have to back up the loan with security eg; assets
- pay back interest
overdraft
a pre-arranged amount of money the business can use and pay back when it likes
overdraft: advantages
- enables short term funding
- flexibility to review the funding
- covers day to day expenses
overdraft: disadvantages
- interest charged if withdrawn
- can be ended by the bank at any time
Grants
amount of money that is given by either the European, national or local govt. to aid the creation of a business.
grants: advantages
- doesnt have to be paid back
- helps start a new business
- provides jobs
grants: disadvantages
- based on application
- not available for all businesses
venture capital
(sometimes called an investor)
someone who invests in a start up business for a % share of the profits
venture capital: advantages
- potential of gaining large sums of money for investment
- expertise to help the business
- makes it easier to attract other sources of finance
venture capital: disadvantages
- lose a percentage of the business
- long and complex process
- expert financial projections are likely to be required
- risk of conflict or perceived interference
Hire Purchase
when you buy an asset and pay for it monthly but you do not own it until you make the final payment.
Hire purchase: advantages
- cheaper than outright buying
- helps manage cash flow
- equipment regularly updated
Hire purchase: disadvantages
- more expensive in the long run due to fees
trade credit
not immediately paying suppliers for stock. - given an amount of time to repay it.
trade credit: advantages
- no interest is payed or repayments
trade credit: disadvantages
- suppliers might not be willing to provide the credit.
share capital
money paid by shareholders to become owners of a limited company
share capital: advantages
- no interest is payed or repayments
share capital: disadvantages
- shareholders receive part of the profits (dividends)
- lose control of the business
crowdfunding
small amounts of capital from a large number of individuals to finance a new business venture. Then you will give rewards or returns for the investment.
crowdfunding: advantages
- can be a fast way to raise finance with no upfront fees
- a good way to test publics reaction to your product
- alternate finance options if you struggle to get a bank loan
crowdfunding: disadvantages
- takes a lot of work to build up interest
- if you don’t meet your funding target, the money is returned to the investor
- Getting rewards or returns wrong can mean giving away too much of the business to investors.
