External Sources Of Finance Flashcards by Deleted Deleted

What are the 15 external sources of finance ?

-Owners capital
-loans
-crowd funding
-mortgages
-venture capital
-debt factoring
-hire purchase
-leasing
-trade credit
-grants
-donations
-peer to peer lending
-invoice discounting
-early payment discounting
-debenture

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What is owners capital ?

Owners capital - this is the money invested into the business from the owners personal savings

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What are advantages of owners capital ?

-no interest payments or need to repay
-high level of commitment from the owner

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What are disadvantages of owners capital ?

-amount available is likely to be limited
-if more than one owned could cause friction if not all able to contribute the same amount

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What are loans ?

Loans - money borrowed from a financial institution normally for a set period of time and for a specific purpose

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What are advantage of loans ?

-regular pre agreed repayments make planning and budgeting easy
-ownership or control is not lost

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What are disadvantages of loans ?

-interest is charged on the amount borrowed
-interest rates can fluctuate
-often secured against an asset which can be repossessed if fail to make repayments

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What is crowd funding ?

Crowd funding - involves raising funds online by asking people to invest a small amount of money each

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What are advantages of crowd funding ?

-offers the ability to raise finance from a large number of investors
-no interest paid

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What are disadvantages of crowd funding ?

-partial loss of ownership
-no guarantee that the crowd fund will attract sufficient investment to meet the proposal

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What are mortgages ?

Mortgages - long term loans to purchase property normally around 25 years

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What are advantages of mortgages ?

-large amount of finance can be raises and repaid over a prolonged period of time
-ownership or control isn’t lost

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What are disadvantages of mortgages ?

-interest is charged on the amount borrowed
-interest rates can fluctuate
-asset such as property repossessed if the repayments are missed

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What is venture capital ?

Venture capital - this is an investment from an experienced entrepreneur in return for a stake in the business

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What are advantages of venture capital ?

-finance is provided by a business professional who will offer advice and mentor alongside the investment

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What are disadvantages of venture capital ?

-partial loss of ownership and control
-conflict can arise between entrepreneur and the venture capitalist

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What is debt factoring ?

Debt factoring - this involves selling on of a businesses debts to a third party in order to receive the cash quickly

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What are the advantages of debt factoring ?

-speeds up the flow of Cash into the business
-the factor company takes on the risk of bad debt

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What are the disadvantages of debt factoring ?

-only receive a percentage of the amount owed therefore reducing profits

What is hire purchase ?

Hire purchase - involves paying to use an asset in instalments to spread the cost over its useful life , asset remains property of the seller until the final instalments

What are advantages of hire purchase ?

-avoids the need to pay a lump sum for the use of an asset
-regular instalments make budgeting easy
-spreads out the cost

What are disadvantages of hire purchase ?

-the overall amount paid for the use of an asset is likely to be higher than if purchased outright

What is leasing ?

Leasing - involves paying to use an asset in instalments to spread the cost , ownership of the asset stays with the supplier

What are advantages of leasing ?

-responsibility for maintaining and repairing the asset stays with the supplier
-spreads out the cost of the asset

What are disadvantages of leasing ?

-overall amount paid for the use of an asset is likely to be higher than if purchased outright -never own the asset so the payments are ongoing

What is trade credit ?

Trade credit - this is a period of time offed by suppliers to allow customers to purchase goods and services now and pay at an alternative later date

What are advantages of trade credit ?

-delays the need to pay for goods and services helping with cash flow -no loss of ownership or control

What are disadvantages of trade credit ?

-only suitable as a short term of finance

What are grants ?

Grants - lump sum of money provided to a business by the government or another organisation to be used for a specific purpose

What are advantages of grants ?

-no need to repay and no interest charges -no loss of ownership or control

What are disadvantages of grants ?

-requires a lengthy application process -only awarded if meet certain criteria -can only spend on specific purpose -may not cover the costs

What are donations ?

Donations - these are sums of money given voluntarily to a charity

What are advantages of donations ?

-no need to repay and no interest charges -no loss of ownership or control

What are disadvantages of donations ?

-likely to be small amounts only -unpredictable

What is peer to peer lending ?

Peer to peer lending - this involves one business lending money to another business in return for interest payments

What are advantages of peer to peer lending ?

-interest rates can be lower than lending from traditional financial institutions -fixed interest rates make it easy to plan and to budget

What are disadvantages of peer to peer lending ?

-amounts available may be limited -provided for a short period of time only

What is invoice discounting ?

Invoice discounting - this involves securing a loan against invoices owed by the business customers , the loan is repaid as payments for invoices received

What are advantages of invoice discounting ?

-improved cash flow as less money tied up in debtor -can pay own debt faster -funds are released quickly

What are disadvantages of invoice discounting ?

-profit is reduced as discounting company will charge a fee -could become reliant on it getting into a endless debt cycle

What is early payment discounting ?

Early payment discounting -reductions offered to customers making a product or service cheaper , often applied as a percentage

What are advantages of early payment discounting ?

-can be used to improve cash flow as encourage debtors to repay quickly -no loss of ownership or control -no need to repay and no interest charges

What are disadvantages of early payment discounting ?

-debtors may choose not to take advantage of the offer

What is a debenture ?

Debenture - involves a form of bond or long term loan which is issued by a company , fixed rate of interest is paid throughout the loan and loan is paid on an agreed date

What are advantages of debentures ?

-fixed rate of interest -only interest is paid until the loan is redeemed

What are disadvantages of debentures ?

-paid back in a lump sum on an agreed date -secured against an asset

What are some factors which may influence the choice of finance a business chooses ?

-amount of money required -how quickly the money is needed -cheapest option available -amount of risk involved -length of time of the requirements for the finance