Lesson 2 Flashcards
What are some external sources of finance?
-family and friends
-banks
-peer - to - peer funding
-business angels
-crowd funding
-other businesses
What are some methods of external finance?
-loans
-share capital
-venture capital
-overdrafts
-leasing
-trade credit
-grants
How do businesses raise finance through family and friends?
Private limited companies are able to raise finance by selling shares to friends and family. A sole trader or partnership may also find that their family may want to contribute to the business. This may be for interest, a share of the profits or maybe even an interest free loan amongst family.
What is the advantage of family and friends a source being of finance?
- Loans from family and friends will probably be offered without the need for security and at lower rates and over longer terms than traditional lenders.
- they are also unlikely to need a business plan which means the owner may not need to write one.
What is a disadvantage of family and friends being a source of finance?
- It may cause tension and problems if the finance is not repaid or the business does not flourish.
- they may also demand their money back at a short notice.
How is banks a source of finance?
- Banks may lend a loan to a business to start - up or when a business to grow and expand
- banks may also provide a business with an overdraft to help when they have cash flow problems.
What is an advantage to banks being a source of finance?
- Banks will lend to businesses without asking for a % of the ownership.
- banks will allow the business owner to continue running the business their own way, and not interfere, so the owner retains control of the business (unlike business angels).
What is a disadvantage of banks being a source of finance?
- Bank loans can be expensive compared to other sources of finance and interest must be paid on time.
- it may be hard for a new business owner to obtain a loan as they have no historical sales data to snow the bank.
- The owner may need to use their own assets as security for the loan e.g. Their own house.
What is peer to peer lending?
- Lending marketplaces such as funding circle have gained the trust of consumers by offering lower rates than banks to business owners who want to borrow money.
- peer to peer funding matches businesses that need Finance with investors who are looking for a good return on their investment.
What is advantages to peer to peer lending?
- Businesses can get access to funding within a week once approved.
- business owners can apply online
What is a disadvantage of peer -to peer lending?
- Peer to peer loans are classified as private business loans, so the money for the loan comes from several investors or small businesses.
- if there is not enough individuals interested/willing to invest in your loan, you may not be able to acquire the entire amount that the business needs.
What is business angels?
- An angel investor offers to lend their personal disposable finance
- The angel would normally take shares in the business in return for providing finance.
- angels normally provide the business with money to grow as well as experience and knowledge to help the company achieve success.
What are advantages of business angels?
- The owner will have no repayments or interest on the money lent.
- The owner gets access to angels mentoring or management skills.
What is a disadvantage of business angels?
Owners need to give up a share of the business
What is crowd funding?
Crowd funding is where a large number of people fund a project over the internet making small investments.
3 ways to fund:
-Donate: no money back, but rewards like tickets or a newsletter.
- lend: get money back with interest and satisfaction of contributing to success of a small business.
- invest: invest in a business in exchange for equity or shares which may increase in value.
