External Sources Of Finance Flashcards
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
What is owners capital ?
Owners capital - this is the money invested into the business from the owners personal savings
What are advantages of owners capital ?
-no interest payments or need to repay
-high level of commitment from the owner
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
What are loans ?
Loans - money borrowed from a financial institution normally for a set period of time and for a specific purpose
What are advantage of loans ?
-regular pre agreed repayments make planning and budgeting easy
-ownership or control is not lost
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
What is crowd funding ?
Crowd funding - involves raising funds online by asking people to invest a small amount of money each
What are advantages of crowd funding ?
-offers the ability to raise finance from a large number of investors
-no interest paid
What are disadvantages of crowd funding ?
-partial loss of ownership
-no guarantee that the crowd fund will attract sufficient investment to meet the proposal
What are mortgages ?
Mortgages - long term loans to purchase property normally around 25 years
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
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
What is venture capital ?
Venture capital - this is an investment from an experienced entrepreneur in return for a stake in the business
What are advantages of venture capital ?
-finance is provided by a business professional who will offer advice and mentor alongside the investment
What are disadvantages of venture capital ?
-partial loss of ownership and control
-conflict can arise between entrepreneur and the venture capitalist
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
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
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
