External sources Flashcards
What is an external source?
Are sources of money from outside the business, from other people putting money into business.
Bank loan
Where the business will borrow a lump sum of money that must be repaid over time with interest.
Advantages of bank loans.
- Repayments in installments
- Makes cashflow easier
- Don’t have to issue shares
Disadvantages of bank loans.
- Have to back up the loan with security (E.g assets) of the business
- Pay back interest
Overdraft
A pre-arranged amount of money that the business is allowed to use and pay back when it likes.
Advantages of overdraft
- Enable short term funding
- Flexibility to review the funding
- Covers day to day expenses
Disadvantages of overdraft
- Interest charge if overdrawn, can be ended by the bank at anytime.
Grants
An amount of money that is given by either the European, national or local government, to aid in the creation of a business. The money does not have to be paid back.
Advantages of Grants
- Does not have to be paid back
- Helps start up new businesses
- Creates jobs
Disadvantages of grants
- Lose a percentage of the business
2. Expert financial projections are likely to be required
Hire purchase
When you will buy an asset, you do not own the asset until you make the last payment. Leasing is similar to hire purchase but you rent the asst and never own it.
Advantages of hire purchase
- Cheaper than buying outright
- Help to manage cash flow
- Equipment regularly updated
Disadvantages of hire purchase
- More expensive in the long run
Trade credit
Meaning not immediately paying suppliers for stock. Given a certain amount of days to pay.
Advantages of trade credit
No interest to be paid, helps cash fow
