2.1.2 external finance* Flashcards
external finance definition
money raised from outside the business
MOF - venture capital definition
money that is invested in a business in which there is a substantial element of risk but has the potential to be successful e.g. start-up business, existing business that wants to grow.
+&- of venture capital
+ the money doesn’t always have to be repaid and the business may benefit from the expert advice that the investors can offer.
- to compensate for risky investment, providers usually require a substantial part of the ownership of the company.
venture capital-
- comes from business angels
- long term
method of finance definition
the process through which a source of finance provides money to a business
MOF - trade credit definition
when goods or services provided by a supplier are not paid for immediately
trade credit-
- common in business to business transactions
- payment takes place within an agreed time limit (30-90dys)
- comes from working capital
- short term
+&- of trade credit
+ can help a business with cash flow as goods do not have to be paid for immediately- wont run out of cash, can pay staff on time, helps grow business.
- if payments aren’t made, the business will get a bad credit rating- harder to get credit from suppliers and finance providers in the future
sources of finance
- family and friends
- banks
- peer to peer funding
- business angels
- crowd funding
- other businesses
considerations for a business when choosing a source of finance
> the amount of money required- larger amount= more likely that businesses will have to pursue external sources of finance
level of risk- risky business is less likely to find a source willing to lend it money
cost- some sources charge interest
time
ownership- some SOF may entail a loss of business ownership
family and friends
+ friends and family may offer the money as a gift or be willing to agree a flexible repayment with little or no interest
- the amount of money available may only be small
- could place a strain on the relationship if they need the money back quickly
banks
> loans, overdrafts and mortgages
+ they are recognised financial institutions and the terms and conditions of their financial products are clear
+ they can advise a business and provide other services e.g. completing financial documents
- banks often have strict lending criteria so it can be hard for start-ups or other risky businesses to be approved for finance
peer-to-peer funding
peer-to-peer funding companies match lenders with borrowers without going through a bank or other financial institution
+ usually have a lower rate of interest than a bank loan
- more difficult to gain this type of funding as lenders are much more careful about whom they lend to due to the risk of losing their money- means that new businesses in particular will find it difficult to find any funding this way.
business angels
> wealthy individuals who invest money into new or innovative businesses.
+ a business angel might have lots of business knowledge and useful contacts
- it can be difficult and time-consuming trying to find a business angel willing to invest.
- business angels may be demanding individuals with considerable pressures on their time .
- business owners have to be comfortable with sharing profits with the angel for as long as they are involved
crowd funding
> crowd funding is raising money from a large number of people usually via internet sites.
+ smaller investors are more likely to take risks, particularly if the business idea is well marketed- the business raises awareness of its product or brand to people using the crowd funding website
- as detail of the business ideas are made public, the business idea are made public, the business risks having its ideas copied by someone else before they got their idea up and running
- if the business idea fails, lots of people may be aware of it, which may negatively affect the reputation of the business
