External Sources of Finance

Question 1

Bank Loan - Definition

Answer 1

Where the business will borrow a lump sum of money that must be repaid overtime with interest.

Question 2

Bank Loan - Advantages

Answer 2

• Repayments in installments
• Makes cash flow easier
• Don’t have to issue shares

Question 3

Bank Loan - Disadvantages

Answer 3

• Have to back up the loan with security e.g. assets of the business
• Pay back interest

Question 4

Overdraft - Definition

Answer 4

A pre-arranged amount of money that the business is allowed to use (when it has none) and pay back when it likes.

Question 5

Overdraft - Advantages

Answer 5

• Enable short term funding
• Flexibility to review the funding
• Covers day to day expenses

Question 6

Overdraft - Disadvantages

Answer 6

-Interest charged if overdrawn, can be ended by the bank at anytime

Question 7

Grants - Definition

Answer 7

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.

Question 8

Grants - Advantages

Answer 8

• Doesn’t have to be paid back
• Helps start new businesses
• Creates jobs

Question 9

Grants - Disadvantages

Answer 9

• Based on application

- Not available for all businesses

Question 10

Venture Capital - Definition

Answer 10

Sometimes called an investor, it is a business person who invests in start up businesses for a % share of the profits.

Question 11

Venture Capital - Advantages

Answer 11

• Potential for large sums of money for investment
• Expertise to help the business
• Makes it easier to attract other sources of finance

Question 12

Venture Capital - Disadvantages

Answer 12

• 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

Question 13

Hire Purchase - Definition

Answer 13

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.

Question 14

Hire Purchase - Advantages

Answer 14

• Cheaper than buying outright
• Helps to manage cash flow
• Equipment regularly updated

Question 15

Hire Purchase - Disadvantages

Answer 15

-More expensive in long run due to fees

Question 16

Trade Credit - Definition

Answer 16

This means not immediately paying suppliers for stock. You are given a certain amount of days to pay e.g 30 days.

Question 17

Trade Credit - Advantages

Answer 17

-No interest to be paid, helps cash flow

Question 18

Trade Credits - Disadvantages

Answer 18

-Suppliers might not be willing to provide the credit

Question 19

Share Capital - Definition

Answer 19

Money paid by shareholders to become owners of a limited company.

Question 20

Share Capital - Advantages

Answer 20

-No interest paid or repayments

Question 21

Share Capital - Disadvantages

Answer 21

• Shareholders receive part of the profits (dividends)

- Lose control of the business

Question 22

Crowdfunding - Definition

Answer 22

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.

Question 23

Crowdfunding - Advantages

Answer 23

• 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

Question 24

Crowdfunding - Disadvantages

Answer 24

• 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