Sources of finance- external

Question 1

What are external sources of finance

Answer 1

Money received by a business from outside the business

Question 2

Examples of external source of finance

Answer 2

Grants, Loan, Mortgage, peer to peer lending, donations, invoice discounting, hire purchase, leasing, venture capital, debt factoring, crowdfunding, owner’s capital, trade credit

Question 3

Owner’s capital

Answer 3

Money invested into the business from the owner’s personal savings
Short term

Question 4

Advantages of owner’s capital

Answer 4

No interest payments, no need to repay, high level commitment from the owner

Question 5

Disadvantages of owner’s capital

Answer 5

Amount available may be limited, if there is more than one owner there ay be friction of they all cannot input the same amount

Question 6

Loans

Answer 6

Money borrowed from a financial institution (bank) for a set period of time and for a specific purpose
Long term

Question 7

Advantages of loans

Answer 7

Regular pre-agreed repayments make planning and budgeting easier, ownership and control is not lost

Question 8

Disadvantages of loans

Answer 8

Interest is charges, interest rates may fluctuate, secured against an asset so if repayments are missed, an asset can be seized

Question 9

Crowdfunding

Answer 9

Attracting investment from a number of investors who may invest relatively small amounts
Short term

Question 10

Advantages of crowdfunding

Answer 10

Ability to raise finance from a large number of investors, no interest is paid

Question 11

Disadvantages of crowdfunding

Answer 11

Partial loss of ownership, may not attract sufficient investments to meet the proposal

Question 12

Mortgages

Answer 12

Long term loans that are secured against assets. Repaid over a long period of time, for a specific purpose (buy a property)
Long term

Question 13

Advantages of mortgages

Answer 13

Large amounts of finance can be raised, no loss of ownership or control

Question 14

Disadvantages of mortgages

Answer 14

Interest is charged, interest rates can fluctuate, secure against an asset, not suitable for small amounts

Question 15

Venture capital

Answer 15

Investment made by an experienced entrepreneur in return for a stake
Long term

Question 16

Advantages of venture capital

Answer 16

Finance is provided by a business professional who my offer advice and mentoring, they are normally risk takers who see potential in high risk investments

Question 17

Disadvantages of venture capital

Answer 17

Partial loss of ownership and control, conflict may arise between the entrepreneur and the venture capitalist about day to day running of the business

Question 18

Debt factoring

Answer 18

Selling on business debts in order to receive cash quickly
Short term

Question 19

Advantages of debt factoring

Answer 19

Speeds up the flow of cash into business from debts, factor company takes risk of bad debt

Question 20

Disadvantages of debt factoring

Answer 20

Only receive a percentage of amount owed which reduces profits, may give wrong impression or alienate customers

Question 21

Hire purchase

Answer 21

Paying to use an asset to spread the cost over its useful life
Long term

Question 22

Advantages of hire purchase

Answer 22

Avoids paying lump sum, regular instalments make planning and budgeting easier, spreads the cost over its useful life

Question 23

Disadvantages of hire purchase

Answer 23

Cost may be higher than if paid for outright, only suitable for low cost assets (vehicles not premises)

Question 24

Leasing

Answer 24

Paying to use an asset spread over its useful life, ownership of the asset stays with the supplier for the length of lease agreement.
Short term

Question 25

Advantages of leasing

Answer 25

Responsible for maintaining and repairing the asset stays with the supplier, spreads the cost over its useful life, avoids paying lump sum upfront

Question 26

Disadvantages of leasing

Answer 26

Cost may be higher than if paid outright, never actual own the asset, payments are ongoing

Question 27

Trade credit

Answer 27

A period of time offered by suppliers to allow the customers to purchase a product/service but pay at a later date
Short term

Question 28

Advantages of trade credit

Answer 28

Delays the need to pay for goods/services which aids cash flow, no loss of ownership or control

Question 29

Disadvantages of trade credit

Answer 29

Potential loss of discounts offered for cash payments, only suitable as a short term source of finance

Question 30

Grants

Answer 30

Lump sum provided to a business by the government, used for a specific purpose
Long term

Question 31

Advantages of grants

Answer 31

No need to repay or pay interest charges, no loss of ownership or control

Question 32

Disadvantages of grants

Answer 32

lengthy application process, may only be awarding if the business meets certain criteria, affecting the way a business runs day to day

Question 33

Donations

Answer 33

Sums of money given voluntarily to a charity or social enterprise
Short term

Question 34

Advantages of donations

Answer 34

No need to repay or pay interest, no loss of ownership or control

Question 35

Disadvantages of donations

Answer 35

Unpredictable, likely to be small amounts only

Question 36

Peer-to-peer lending

Answer 36

One business person lending money to another business person in return for interest payments
Short term

Question 37

Disadvantages of peer to peer lending

Answer 37

Amounts available may be limited and provided for a short period of time only

Question 38

Advantages of peer to peer lending

Answer 38

Interest rates can be lower than lending from more traditional financial institutions, fixed rate of interest can be agreed making it easier to plan and budget

Question 39

Invoice discounting

Answer 39

Reductions offered to customers making a product/service cheaper
Short term

Question 40

Advantages of invoice discounting

Answer 40

No need to repay or pay interest charges, no loss of ownership or control, reduces cost to the business so increases profit

Question 41

Disadvantages of invoice discounting

Answer 41

Often only available if purchases are paid in cash which affects cash flow