External sources of finance

Question 1

External sources

Answer 1

Money from outside the business

Question 2

Where do external sources come from?

Answer 2

Other people putting money into the business

Question 3

Bank loan

Answer 3

A business borrowing a lump sum which they repay over time with interest

Question 4

bank loans

Answer 4

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

Question 5

Disadvantages of bank loans

Answer 5

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

Question 6

Overdraft

Answer 6

Pre-arranged amount of money that a business is allowed to use (when it has none) and pay back when it likes

Question 7

Advantages of overdrafts

Answer 7

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

Question 8

Disadvantages of overdrafts

Answer 8

Interest charged if overdrawn

Can be ended by the bank at any time

Question 9

Grants

Answer 9

Amount of money that is given by a government to aid the creation of a business which doesn’t need to be paid back

Question 10

Advantages of grants

Answer 10

Doesn’t need to be paid back
Helps start up a new business
Creates jobs

Question 11

Disadvantages of grants

Answer 11

Based on application

Not available for all businesses

Question 12

Venture capital

Answer 12

Sometimes called an investor, someone who invests in a startup business for a % share of the profits

Question 13

Advantages of venture capital

Answer 13

Potential for large sums of money for investment
Expertise to help the business
Easier to attract other sources of finance

Question 14

Disadvantages of venture capital

Answer 14

Lose a % of their business
Long and complex process
Expert financial projections are likely to be required
Risk of conflict or perceived interference

Question 15

Hire purchase

Answer 15

Buy an asset e.g a car and pay for it monthly. You don’t own the asset until you make the final payment

Question 16

Advantages of hire purchase

Answer 16

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

Question 17

Disadvantages of hire purchase

Answer 17

More expensive in the long run due to fees

Question 18

Trade Credit

Answer 18

Not immediately paying suppliers for stock. Given a certain amount of days to pay e.g 30 days

Question 19

Advantages of trade credit

Answer 19

No interest to be paid

Helps cash flow

Question 20

Disadvantages of trade credit

Answer 20

Suppliers may not be willing to provide credit

Question 21

Share capital

Answer 21

Money paid by shareholders to become owners of a limited company

Question 22

Advantages of share capital

Answer 22

No interest paid or repayments

Question 23

Disadvantages of share capital

Answer 23

Shareholders receive part of the profits (dividends)

Lose control of the business

Question 24

Crowdfunding

Answer 24

Small amounts of capital from large number of individuals to finance a new business. You give rewards or returns for the investment

Question 25

Advantages of crowdfunding

Answer 25

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