Internal and External Finance

Question 1

External Finance

Answer 1

Refers to money that comes from outside the business

Question 2

Owner’s Capital

Answer 2

Money invested in the business from the owner’s personal savings

Question 3

Loans

Answer 3

Money borrowed from a financial institution normally from a set period of time and for a specific purpose

Question 4

Crowd-funding

Answer 4

Attracting investment from a large number of speculative investors many of whom may invest relatively small amounts

Question 5

Mortgage

Answer 5

Long-term loans, normally around 25 years, that are secured against a specific asset e.g a building

Question 6

Venture Capital

Answer 6

Investment from an experienced entrepreneur in return for a stake in the business.

Question 7

Debt Factoring

Answer 7

Selling the debts of a business to a third party in order to receive a quick cash injection

Question 8

Hire Purchase

Answer 8

Paying to use an asset in instalments to spread the cost overs it useful life

Question 9

Trade Credit

Answer 9

A period of time, offered by suppliers, to allow the customer to purchase now and pay later

Question 10

Grants

Answer 10

A lump sum provided to a business by the government or another organisation to be used for a specific purpose

Question 11

Donations

Answer 11

Sums of money given voluntarily to a charity or social enterprise

Question 12

Peer to peer lending

Answer 12

Involves one business lending money to another business person in return for interest payments

Question 13

Invoice Discounting

Answer 13

Reductions offered to customers making a product or service cheaper. Usually applied as a percentage of the total value

Question 14

Ad of Owner’s Capital

Answer 14

• No interest payments or a need to repay

- Will generate a high level of commitment from the owner in order to protect their investment

Question 15

Dis of Owner’s Capital

Answer 15

• Amount available is likely to be limited

- Can cause friction when multiple owners do not invest the same amount

Question 16

Ad of Loans

Answer 16

• Regular pre-agreed repayments make planning and budgeting easier
• Ownership or control is not lost

Question 17

Dis of Loans

Answer 17

• Interest will be payable on the loan

- Often secured against an asset which can be taken if repayments are missed

Question 18

Ad of Crowd-Funding

Answer 18

• 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

Question 19

Dis of Crowd-Funding

Answer 19

• Partial loss of ownership

- No guarantee that the crowd-fund will attract sufficient investment to meet the proposal

Question 20

Ad of Mortgages

Answer 20

• Ownership and control is not lost

- Large amount of finance can be raised and repaid over a long period of time

Question 21

Dis of Mortgages

Answer 21

• Interest on borrowing must be paid regardless of whether a profit is made
• Not suitable for small amount or as a short-term loan

Question 22

Ad of Venture Capital

Answer 22

• 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

Question 23

Dis of Venture Capital

Answer 23

• 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

Question 24

Ad of Debt Factoring

Answer 24

• Speeds up the flow of cash into a business from debts

- The factor company takes on the risk of the bad debt

Question 25

Dis of Debt Factoring

Answer 25

- The business will only receive a percentage of the amount owed, therefore reducing profits - Can upset customers who have been loyal to the business

Question 26

Ad of Hire Purchase

Answer 26

- Avoids the need to pay a lump sum for the use of an asset | - Regular instalments mean that planning and budgeting are easier

Question 27

Dis of Hire Purchase

Answer 27

- 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

Question 28

Ad of Trade Credit

Answer 28

- Delays the need to pay for goods and services purchased and therefore improves cash flow - No loss of ownership or control

Question 29

Dis of Trade Credit

Answer 29

- Potential loss of discounts that could be offered for cash payments - Only suitable as a short-term source of finance

Question 30

Ad of Grants

Answer 30

- No need to repay the amount | - No interest charges

Question 31

Dis of Grants

Answer 31

- Often require a lengthy application process | - May rely on certain conditions being met which impacts on the running of the business

Question 32

Ad of Donations

Answer 32

- No loss of ownership or control | - No need to repay

Question 33

Dis of Donations

Answer 33

- Likely to be small amounts | - Unpredictable as a source of finance

Question 34

Ad of Peer to Peer Lending

Answer 34

- Interest rates can be lower than lending from more traditional financial institutions - A fixed rate of interest can be agreed making budgeting easier

Question 35

Dis of Peer to Peer Lending

Answer 35

- Amounts available may be limited in value | - Funds may only be available for a short period of time

Question 36

Ad of Invoice Discounting

Answer 36

- No need to repay and no interest charges | - Reduces costs to the business and therefore increases profit

Question 37

Dis of Invoice Discounting

Answer 37

- 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