External Sources of Finance Flashcards
Bank Loan - Definition
Where the business will borrow a lump sum of money that must be repaid overtime with interest.
Bank Loan - Advantages
- Repayments in installments
- Makes cash flow easier
- Don’t have to issue shares
Bank Loan - Disadvantages
- Have to back up the loan with security e.g. assets of the business
- Pay back interest
Overdraft - Definition
A pre-arranged amount of money that the business is allowed to use (when it has none) and pay back when it likes.
Overdraft - Advantages
- Enable short term funding
- Flexibility to review the funding
- Covers day to day expenses
Overdraft - Disadvantages
-Interest charged if overdrawn, can be ended by the bank at anytime
Grants - Definition
An amount of money that is given by either the European, national or local government, to aid in the creation of a business. This money DOES NOT have to be paid back.
Grants - Advantages
- Doesn’t have to be paid back
- Helps start new businesses
- Creates jobs
Grants - Disadvantages
- Based on application
- Not available for all businesses
Venture Capital - Definition
Sometimes called an investor, it is a business person who invests in start up businesses for a % share of the profits.
Venture Capital - Advantages
- Potential for 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
- A long and complex process
- Expert financial projections are likely to be required
- Risk of conflict or perceived interference
Hire Purchase - Definition
Is when you will buy an asset e.g a car and pay for it monthly. You do not own the asset until you make the last payment. Leasing is similar to hire purchase but you rent the asset and never own it.
Hire Purchase - Advantages
- Cheaper than buying outright
- Helps to manage cash flow
- Equipment regularly updated
Hire Purchase - Disadvantages
-More expensive in long run due to fees
Trade Credit - Definition
This means not immediately paying suppliers for stock. You are given a certain amount of days to pay e.g 30 days.
Trade Credit - Advantages
-No interest to be paid, helps cash flow
Trade Credits - Disadvantages
-Suppliers might not be willing to provide the credit
Share Capital - Definition
Money paid by shareholders to become owners of a limited company.
Share Capital - Advantages
-No interest paid or repayments
Share Capital - Disadvantages
- Shareholders receive part of the profits (dividends)
- Lose control of the business
Crowdfunding - Definition
Small amounts of capital from a large number of individuals to finance a new business venture. You will give rewards or returns for the investment.
Crowdfunding - Advantages
- It can be a fast way to raise finance with no upfront fees
- Good way to test the public’s reaction of your product
- Alternative finance option if you struggle to get a bank loan or other funding
Crowdfunding - Disadvantages
- Takes a lot of work to build up interest
- If you don’t need your funding target the money is returned to the investors
- Getting rewards or returns wrong mean giving away too much of the business to investors
