External sources of finance Flashcards
External sources
Money from outside the business
Where do external sources come from?
Other people putting money into the business
Bank loan
A business borrowing a lump sum which they repay over time with interest
bank loans
Repayments in installments
Makes cash flow 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
Pre-arranged amount of money that a business is allowed to use (when it has none) and pay back when it likes
Advantages of overdrafts
Enable short term funding
Flexibility to review the funding
Covers day to day funding
Disadvantages of overdrafts
Interest charged if overdrawn
Can be ended by the bank at any time
Grants
Amount of money that is given by a government to aid the creation of a business which doesn’t need to be paid back
Advantages of grants
Doesn’t need to be paid back
Helps start up a new business
Creates jobs
Disadvantages of grants
Based on application
Not available for all businesses
Venture capital
Sometimes called an investor, someone who invests in a startup business for a % share of the profits
Advantages of venture capital
Potential for large sums of money for investment
Expertise to help the business
Easier to attract other sources of finance
Disadvantages of venture capital
Lose a % of their business
Long and complex process
Expert financial projections are likely to be required
Risk of conflict or perceived interference
Hire purchase
Buy an asset e.g a car and pay for it monthly. You don’t own the asset until you make the final payment
Advantages of hire purchase
Cheaper than buying outright
Helps to manage cash flow
Equipment regularly updated
Disadvantages of hire purchase
More expensive in the long run due to fees
Trade Credit
Not immediately paying suppliers for stock. Given a certain amount of days to pay e.g 30 days
Advantages of trade credit
No interest to be paid
Helps cash flow
Disadvantages of trade credit
Suppliers may not be willing to provide credit
Share capital
Money paid by shareholders to become owners of a limited company
Advantages of share capital
No interest paid or repayments
Disadvantages of share capital
Shareholders receive part of the profits (dividends)
Lose control of the business
Crowdfunding
Small amounts of capital from large number of individuals to finance a new business. You give rewards or returns for the investment
Advantages of crowdfunding
Fast way to raise finance with no upfront fees
Good way to test public relations of your product
Alternative finance option if you can’t get a loan or other funding
