External Sources Of Finance

Question 1

Bank loan

Answer 1

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

Question 2

Bank Loan - Advantages

Answer 2

1. Repayments in instalments
2. Cash flow is easier
3. Don’t have to issue shares

Question 3

Bank Loan - Disadvantages

Answer 3

1. Have to back up the loan with security

2. Pay back interest

Question 4

Overdraft

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

1. Enable short term funding
2. Flexibility to review the funding
3. Covers day to day expenses

Question 6

Overdraft - Disadvantages

Answer 6

1. Interest charged if overdrawn, can be ended by the bank at any time

Question 7

Grants

Answer 7

An amount of money that is given either by the European, national or local government, to aid in the creation of a business. Doesn’t have to be paid back

Question 8

Grants - Advantages

Answer 8

1. Doesn’t have to be paid back
2. Helps a start up business
3. Creates jobs

Question 9

Grants - Disadvantages

Answer 9

1. Based on application

2. Not available for all business

Question 10

Venture Capital

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

1. Potential for large sums of money for investment
2. Expertise to help the business
3. Makes it easier to attract over sources of finance

Question 12

Venture Capital - Disadvantages

Answer 12

1. Lose a percentage of the business
2. A long and complex process
3. Expert financial projections are likely to be required
4. Risk of conflict or perceived interference

Question 13

Hire purchase

Answer 13

When you will buy an asset and pay for it month eg a car. You do not own the asset until you make the last payment.

Question 14

Hire purchase - Advantages

Answer 14

1. Cheaper than buying outright
2. Helps to manage cash flow
3. Equipment regularly updated

Question 15

Hire Purchase - Disadvantages

Answer 15

1. More expensive in long run due to fees

Question 16

Trade Credit

Answer 16

Not immediately paying suppliers for stock. You are given a certain amount of days to pay eg 30 days

Question 17

Trade Credit - Advantages

Answer 17

1. No interest paid or repayments

Question 18

Trade Credit - Disadvantages

Answer 18

1. Suppliers might not be willing to provide the credit

Question 19

Crowdfunding

Answer 19

Small amounts of capital from a large number of individuals to finance a new business venture. You will be given rewards or returns for the investments

Question 20

Crowdfunding - Advantages

Answer 20

1. It can be fast to raise financially with no upfront fees
2. Good way to test public reactions of product
3. Alternative finance option if you struggle to get a bank loan or other funding

Question 21

Crowdfunding - Disadvantages

Answer 21

1. Takes a lot of work to build up interest
2. If you don’t meet your funding target money is getting returned to investors
3. Getting rewards or returns wrong can mean giving away too much of the business to investors

Question 22

Share Capital

Answer 22

Money paid by shareholders to become owners of a limited company

Question 23

Share Capital - Advantaged

Answer 23

1. No interest paid or requirements

Question 24

Share Capital - Disadvantages

Answer 24

1. Shareholders receive part of the profits

2. Lose controls over business