external sources of finance Flashcards
Bank loan
business borrows a lump of money repaid overtime with interest
Bank loan advantages
repay in instalments
easier cash flow
Bank loan of disadvantages
have to back up the loan with security
pay back interest
Overdraft
pre arranged amount of money that a business is allowed to use and pay back when it likes
Overdraft advantages
enable short term funding
covers day to day expenses
Overdraft disadvantages
interest charged if overdrawn
can be ended by the bank at any time
Grants
amount of money the European, national or local government to aid the creation of a business
Grants advantages
Doesn’t have to be paid back
helps to start up a new business
creates jobs
Grants disadvantages
based on application
not available for all businesses
Venture capital
person who invests in a start up business for a % share of the profits
Venture capital advantages
potential for large sums of money
expertise to help the business
easier to attract other sources of finance
Venture capital disadvantages
lose a percentage
long and complex process
financial projections are likely to be required
risk of conflict
Hire purchase
you do not own the asset until you make the last payment
Hire purchase advantages
cheaper than buying outright
helps to manage cash flow
equipment regularly updated
Hire purchase disadvantages
more expensive in the long run due to fees
Trade credit
not immediately paying suppliers for stocks given a certain amount of days to pay
Trade credit advantages
no interest paid or repayments
Trade credit disadvantages
suppliers might not be willing to provide the credit
Share capital
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
lose control of the business
Crowdfunding
small amount of capitals from a large amount of individuals to finance a new business venture
Crowdfunding advantages
fast way to raise finance with no upfront fees
good way to test public reactions 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 dont meet your funding target the money is refunded to the investors
getting rewards or returns wrong can mean giving away too much of the business to investors
