External Sources of Business Finance Flashcards
External Sources
Sources of money from other people putting money into the business
Bank loan
Businesses borrow a lump sum of money must be repaid over time.
Bank loan advantages
Repayments in installments
Cash flow easier
Don’t have to issue shares
Bank loan disadavantages
Back up the loan with security
Pay back interest
Overdraft
Prearranged money that business is allowed to use when it has none
Overdraft advantages
Short term funding
Flexibility to review funding
Covers day to day expenses
Overdraft disadvantages
Interest charged, can be ended by the bank at any time
Grants
Amount of money given by government to aid the creation of a business
Grants advantages
Doesn’t have to be paid back
Helps start up a new business
Creates jobs
Grants disadvantages
Based on application
Not available for all business
Venture Capital
Business person who invests in a start up business for % share of profits
Venture Capital advantages
Potential large sums of money
Expertise to help the business
Easier to attract other sources of finance
Venture Capital disadvantages
Lose percentage of business
Long complex process
Expert financial projections likely required
Hire Purchase
Buy an asset and not pay for it monthly, you do not own the asset until last payment made.
Hire Purchase advantages
Cheaper
Manage cash flow
Equipment regularly updated
Hire Purchase disadvantages
More expensive in the long run
Trade Credit
Not immediately paying suppliers for stock
Trade Credit advantages
No interest paid
Helps cash flow
Trade Credit disadvantages
Suppliers might not provide credit
Share Capital
Money paid by shareholders become owners of company
Share Capital advantages
No interest paid or repayments
Share Capital disadvantages
Shareholders receive part of profit
Lose control of business
Crowd Funding
Small amount of capital from large number of individuals finance new business venture
Crowd Funding advantages
Fast way raise finance
Test publics reaction
Alternate finance option if struggle on loans
Crowd Funding disadvantages
A lot of work to build up interest
Don’t meet target, money is returned to investors
Rewards or returns wrong mean giving too much of business to investors
