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Business > 2.1.2 External Finance > Flashcards

2.1.2 External Finance Flashcards

1
Q

External finance

A

Investment for the business that is obtained from; banks investors and lender outside of the business

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2
Q

Source of finance

A

This is where the finance has come from - a bank (external or internal)

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3
Q

Method of finance

A

This is the use of a finance or what it would be suitable for - loan to buy computer equipment for a firm

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4
Q

What are the external sources of finance for a business?

A 
Family and friends
Banks 
Peer-to-peer funding 
Business angels 
Crowd funding 
other businesses
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5
Q

Family and friends

A

Private limited companies are able to raise finance by selling shares to friends or family
-may find that family want to contribute to the business for interest, a share of the profits or maybe an interest free loan amongst family

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6
Q

Family and friend advantages

A
  • 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
  • Unlikely to need a business plan which means the owner may not need to write one
  • this can be quicker and cheaper to arrange -flexible
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7
Q

Family and friends disadvantages

A
  • May cause tension and problems if the finance is not repaid or the business does not flourish
  • may also demand their money back at short notice
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8
Q

Bank

A

Banks may lend a loan to a business to start-up or when a business wants to grow and expand
-may also provide a business with an overdraft to help when they have cash flow problems

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9
Q

Bank advantages

A
  • Banks will lend to a business without asking for a % of the ownership
  • Banks will allow the business owner to continue running the business their own way and not intruders, owner retains control of business
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10
Q

Banks disadvantages

A
  • Bank loans can be expensive compared to other sources of finance and interest must be paid back on time
  • it may be hard for a new business owner to obtain a loam as they have no historical sales data to show the bank
  • The owner may need use their own assets as security for their loan - their house
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11
Q

Peer to peer funding

A

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
-matches businesses that need finance with investors who are looking for a good return on their investment

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12
Q

Peer to peer funding advantages

A
  • Businesses can get access to funding within a week once approved
  • Business owners can apply online
  • Investors can expect returns of 6-7% whereas a savings account might only give them 3%
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13
Q

Peer to peer funding disadvantages

A
  • 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 are not enough individuals interested or willing to invest in your loan, you may not be able to acquire the entire amount that the business needs
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14
Q

Business angels

A
  • An Angel investor offers to lend their personal disposable finance, take shares in the business in return for providing finance
  • Angels normally seek to not only provide the business with money to grow, but also bring their experience and knowledge to help the company achieve success
  • Usually smaller loan amounts than a venture capitalist
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15
Q

Business angels advantages

A
  • Angels are free to make investment decisions quickly
  • The owner gets access to your investor’s sector knowledge and contacts
  • The owner gets access to angels mentoring or management skills
  • The owner will have no repayments or interest on the money lent
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16
Q

Business angels disadvantages

A
  • Not suitable for investments below £10,000 or more than £500,000
  • Owner needs to give up a share of the business - dilution of ownership
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17
Q

Crowdfunding - what is it and the 3 different ways?

A

Crowd funding is where a large number of people fund a project over the internet making small investments each, 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
18
Q

Crowdfunding advantages

A
  • Good alternative to loans for small business owners
  • Finance can be obtained without paying upfront fees
  • The business can generate funds and also promote the business at the same time
19
Q

Crowdfunding disadvantages

A
  • The business will need to show case their idea to investors and may need to put together a video and other promotional material to attract investors
  • may take a long time
  • ideas could be stolen
20
Q

Other businesses

A

Some large Multi-national businesses are willing to invest in innovative start up

21
Q

Methods of finance examples

A 
loans
share capital
venture capital
overdrafts
leasing
trade credit
grants
22
Q

Loans

A

-provides a long term finance for a start up with the bank stating the fixed period the loan is provided , the rate of interest and amount of repayments, money that is borrows from the bank
Banks will lend to small business but may not lend when they first start-up as there is no track record or history of them making money.

23
Q

Loans advantages

A
  • As the loan is fixed for a certain length of time the business owner can plan ahead and knows exactly what the repayments will be and when they will leave the bank account
  • Banks will not ask for a % of the business or get involved in the running of the business
  • Getting into a high street bank to apply for a business loan is a straightforward process
24
Q

Loans disadvantages

A
  • A bank will charge interest on the loan
  • Not very flexible, the business may incur a penalty if they decide to settle the loan early
  • A bank will ask for security or collateral on a loan this may be a house or another asset that can be seized if the loan is not paid back
25
Q

Share capital

A

In a public limited company – plc - one that has been floated on the stock market - they can raise more finance to expand by having an ordinary share issue
-Finance raised from the selling of shares

26
Q

Share capital advantages

A
  • Investors are often prepared to provide extra funding as the business grows
  • More cost effective way to raise finance than a loan – no interest to pay back
  • Finance is based on acquiring more equity rather getting further into debt
27
Q

Venture capital

A

Provision of finance from professional investors in return for equity usually or could be loans. Riskier projects are often financed this way
-The VC will look for a high rate of return in a specific time period.

28
Q

Venture capital advantages

A
  • Useful if the business is looking to raise a large amount of money in a short space of time e.g. £1 million
  • The business gets all the skills of the venture capital business, their network and links may increase revenue streams
  • Great for owners who have been refused a loan from a bank
29
Q

Venture capital disadvantages

A
  • Venture capital firms look for a strong business plan, sound management and a proven track record, making it difficult for start-up firms
  • Venture capital firms typically want 20-30% stake in the business
30
Q

Overdraft

A

A facility provided by a bank where depositors can go into a negative balance in the bank account

  • An overdraft may be organised by the bank which is short term lending of smaller amounts of money
  • Once its arranged (say £2,000) on an account a business can dip into it or pay it back as they see fit
31
Q

Overdraft advantages

A

-For a business owner this would idea as a quick fix method to tide the business over a difficult month of trading
-An overdraft can be arranged on the phone
or online with an instant decision from the bank
-The business will only pay interest on the amount of money that they are overdrawn
-As soon as the business improves trading they can easily pay back the overdraft to the bank and the interest charges will stop

32
Q

Overdraft disadvantages

A
  • If the business goes over this amount the overdraft will be “unauthorised” and the business will be charged heavily
  • Very expensive source of finance, very high charges and interest rates
  • Not suitable for large amounts over a long period of time
33
Q

Leasing

A

When an asset is rented rather than purchased

  • As a business grows it may decide that it needs some more vehicles or equipment
  • They may decide to lease so that the equipment can be updated regularly and spread the cost
  • They will never own the equipment but will get the option to change it when it wears out
34
Q

Leasing advantages

A
  • This is a lower monthly costs for a business owner than a loan
  • Often business leases can be arranged without any advanced fees being paid
  • The leasing firm maintain the equipment, vans, cars etc. so the business will always have reliable working equipment
35
Q

Leasing disadvantages

A
  • Leasing is often over a fixed term, if the business changes its mind and wants to lease from a different company, contracts may be difficult to get out of
  • Expensive in the long run, early termination fees
36
Q

Trade credit

A

When a business is able to buy now and pay later for its supplies

37
Q

Trade credit advantages

A
  • Business can sell the goods before the stock needs to be paid for, so can make a profit before the costs have to be paid
  • No interest has to be paid on trade credit
  • Businesses that pay regularly on time can build relationships with their suppliers and secure better deals
38
Q

Trade credit disadvantages

A
  • Not all stock is available to buy using the trade credit method, so only applies to certain industries
  • If the business does not pay in time they risk being refused further credit by the supplier in the future
39
Q

Grants

A

Money given by the government or local council to businesses who are making a positive difference in the community

  • The UK government provides financial help to businesses in some areas of the country, in an effort to overcome problems of unemployment.
  • Government grants do not normally have to be repaid and owners keep full control of their business.
40
Q

Grants advantages

A
  • The business usually will not have to pay the grant back
  • Unlike a loan there will be no interest to pay
  • The business owner will get funds without any loss of control of the business
41
Q

Grants disadvantages

A
  • A business will have to find a grant that suits their specific project, which can be difficult
  • There’s a lot of competition for grants
  • The business may be expected to match the funds they are awarded, eg a grant might cover part of the cost of a project
  • Grants are usually awarded for proposed projects, not ones that have already started
  • The application process can be time-consuming

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