Internal and External Finance Flashcards
External Finance
Refers to money that comes from outside the business
Owner’s Capital
Money invested in the business from the owner’s personal savings
Loans
Money borrowed from a financial institution normally from a set period of time and for a specific purpose
Crowd-funding
Attracting investment from a large number of speculative investors many of whom may invest relatively small amounts
Mortgage
Long-term loans, normally around 25 years, that are secured against a specific asset e.g a building
Venture Capital
Investment from an experienced entrepreneur in return for a stake in the business.
Debt Factoring
Selling the debts of a business to a third party in order to receive a quick cash injection
Hire Purchase
Paying to use an asset in instalments to spread the cost overs it useful life
Trade Credit
A period of time, offered by suppliers, to allow the customer to purchase now and pay later
Grants
A lump sum provided to a business by the government or another organisation to be used for a specific purpose
Donations
Sums of money given voluntarily to a charity or social enterprise
Peer to peer lending
Involves one business lending money to another business person in return for interest payments
Invoice Discounting
Reductions offered to customers making a product or service cheaper. Usually applied as a percentage of the total value
Ad of Owner’s Capital
- No interest payments or a need to repay
- Will generate a high level of commitment from the owner in order to protect their investment
Dis of Owner’s Capital
- Amount available is likely to be limited
- Can cause friction when multiple owners do not invest the same amount
Ad of Loans
- Regular pre-agreed repayments make planning and budgeting easier
- Ownership or control is not lost
Dis of Loans
- Interest will be payable on the loan
- Often secured against an asset which can be taken if repayments are missed
Ad of Crowd-Funding
- Offers the ability to raise finance from a large number of investors
- No interest is paid as the investors are only rewarded if the business is successfully sold at a later date
Dis of Crowd-Funding
- Partial loss of ownership
- No guarantee that the crowd-fund will attract sufficient investment to meet the proposal
Ad of Mortgages
- Ownership and control is not lost
- Large amount of finance can be raised and repaid over a long period of time
Dis of Mortgages
- Interest on borrowing must be paid regardless of whether a profit is made
- Not suitable for small amount or as a short-term loan
Ad of Venture Capital
- Finance is provided by a business professional who will often offer advice and mentoring in addition to the investment
- Venture capitalists are often risk takers and will see potential in high risk investments that other investors e.g banks may not
Dis of Venture Capital
- Partial loss of ownership and control
- Potential for conflict between the owner and the venture capitalist when decisions are being made about the day-to-day running
Ad of Debt Factoring
- Speeds up the flow of cash into a business from debts
- The factor company takes on the risk of the bad debt
Dis of Debt Factoring
- The business will only receive a percentage of the amount owed, therefore reducing profits
- Can upset customers who have been loyal to the business
Ad of Hire Purchase
- Avoids the need to pay a lump sum for the use of an asset
- Regular instalments mean that planning and budgeting are easier
Dis of Hire Purchase
- The asset remains the property of the seller until the final payment is made
- Suitable for relatively low cost assets e.g vehicles or machinery
Ad of Trade Credit
- Delays the need to pay for goods and services purchased and therefore improves cash flow
- No loss of ownership or control
Dis of Trade Credit
- Potential loss of discounts that could be offered for cash payments
- Only suitable as a short-term source of finance
Ad of Grants
- No need to repay the amount
- No interest charges
Dis of Grants
- Often require a lengthy application process
- May rely on certain conditions being met which impacts on the running of the business
Ad of Donations
- No loss of ownership or control
- No need to repay
Dis of Donations
- Likely to be small amounts
- Unpredictable as a source of finance
Ad of Peer to Peer Lending
- Interest rates can be lower than lending from more traditional financial institutions
- A fixed rate of interest can be agreed making budgeting easier
Dis of Peer to Peer Lending
- Amounts available may be limited in value
- Funds may only be available for a short period of time
Ad of Invoice Discounting
- No need to repay and no interest charges
- Reduces costs to the business and therefore increases profit
Dis of Invoice Discounting
- Often only available if purchases are made using cash-this will impact on cash flow
- May need to buy in larger quantities that are not required to receive a specified discount
