Theme 2- External Finance Flashcards
Family and friends
- ask fam/ friends to help out financially
- flexible repayment with no interest
- amount of money is small
- could strain relationship
Banks
- can offer loans, overdrafts and mortgages
- recognised financial institutions and terms and conditions are clear
- strict lending criteria
Peer to peer lenders
- operate online
- allows individuals to lend money to others
- Lenders= say how much they are willing to lend and sort an interest rate
- Borrowers= how much they want to borrow and why, how long they want the loan
- Lending company assesses how risky the borrower is and matches with an appropriate lender
- peer-to-peer loans have a lower interest rate than bank loans
Business angels
- wealthy people who invest money into businesses that they think have the potential to be successful
- offer advice and guidance for a share in the business
- They have lots of business knowledge and useful contacts
- difficult and time-consuming trying to find a business angel willing to invest
Crowd funding
- raising money from a large number of people, usually via the internet
- To be crowd funded, business puts details onto a website and these are made public
- rewards sometimes offered for donations
- raises awareness of product/ brand
- risk of being copied
- of business fails, lots of people aware = bad reputation
Other businesses
- business with large retained profit may want to invest
- a business might want to offer finance to a firm that aids it’s own success
- business offering may want a share which means they can gain control
What are the 7 methods of finance?
- Loans
- Share capital
- Venture capital
- Overdrafts
- Leasing
- Trade credit
- Grants
Loans
Fixed amount is borrowed and paid over a fixed period of time with interest
Pro: business only has to pay back loan and interest- loan provider won’t own any of the business
Con: difficult to arrange
Share capital
Money raised by selling shares in the business
Pros: money doesn’t need to be repaid, new shareholders can bring expertise
Cons: og owner no longer owns all shares, shareholders expect a share of the profits, costly and time-consuming
Venture capital
- Money that can be used for a business that is high risk but has the potential to be successful
- can be provided by business angels but provide much more money
- Firm has to give up share
- money doesn’t have be to repaid and business may benefit from advice for investors
Overdrafts
Where a banks let’s a business have a negative amount in its bank account
Pros: easily to arrange and flexible, only pay interest on amount of overdraft they actually use
Cons: high rates of interest, may be a charge
Leasing
Paying monthly sums of money over a set period of time, in return for the use of an asset (machinery/ property)
Pros: doesn’t have to pay a large up- front sum of money, asset leased is up to date so is unlikely to become fault and sometimes maintenance and repair costs are included in the lease
Cons: more costly in the long run that buying an asset outright
Trade credit
When a business buys a good or service and doesn’t have to pay straight away
Pros: helps a business with cash flow
Cons: missing out on discounts, failure to pay on time= interest charged by supplier and may be charged a fee and a bad credit rating ( harder to get credit from suppliers in the future)
Grants
- A fixed sum of money given to a business, often by the government
- Need to apply to get a grant
Pros: doesn’t have to be paid back, no interest and shares, application process forces a business to think thoroughly about the project
Cons: application can be long and time- consuming and there’s a risk it may not be successful, usually a strict criteria from the grant provider
