1.27 External Finance Flashcards
(17 cards)
What is external finance?
External finance refers to funds obtained from sources outside the business, such as banks, investors, or crowdfunding, rather than relying on internal profits.
Why might a new business struggle to access external finance?
New businesses often lack a trading record, making them riskier for lenders and investors. Without proven profitability, securing loans or investments is difficult.
What are the main sources of external finance?
- Family & Friends
- Banks
- Peer-to-peer (P2P) lending
- Business Angels
- Crowdfunding
- Other Businesses
What are the advantages and disadvantages of borrowing from family and friends?
Advantages: Low or no interest rates, flexible repayment terms, minimal interference.
Disadvantages: Can cause personal conflicts, lacks legal documentation, potential misunderstandings.
How does bank lending work for businesses?
Banks provide loans, overdrafts, and mortgages. Most commercial banks have business specialists to advise on financing. Borrowers usually need a business plan and collateral.
What are the key features of peer-to-peer (P2P) lending?
- Lenders and borrowers are matched online
- Loans are unsecured (higher risk for lenders)
- Transactions are handled through platforms like Zopa or Funding Circle
- Interest rates may be lower than traditional bank loans
Who are business angels, and what do they do?
Business angels are wealthy individuals who invest in startups and early-stage businesses, typically providing between £10,000 and £100,000 in exchange for equity (a share of the company).
What is crowdfunding, and how does it work?
Crowdfunding involves raising small amounts of money from many people, usually through online platforms like Kickstarter. Investors may contribute as donations, loans, or in exchange for shares.
What are the different methods of external finance?
- Loans (secured & unsecured)
- Share capital
- Venture capital
- Overdrafts
- Leasing
- Trade credit
- Grants
What is the difference between secured and unsecured loans?
- Secured loans: Require collateral (e.g., property) and have lower interest rates.
- Unsecured loans: Don’t require collateral but have higher interest rates, making them riskier for lenders.
What is share capital?
Share capital is money raised through the sale of shares in a business. It’s common for limited companies.
What are the different types of shares?
- Ordinary shares: Most common, highest risk, variable dividends
- Preference shares: Fixed dividend, paid before ordinary shareholders
- Deferred shares: Issued to founders or executives, dividends paid last
How does venture capital work?
Venture capitalists invest in small and medium-sized businesses with high growth potential. They provide funding in exchange for equity and usually exit the business within five years.
What is an overdraft, and how can businesses use it?
An overdraft allows businesses to spend more money than they have in their bank account, providing short-term finance. Interest is only charged on the overdrawn amount.
What is leasing, and why might a business lease instead of buying?
Leasing is renting equipment or property instead of purchasing it outright. Businesses lease to avoid large upfront costs and maintenance responsibilities.
What is trade credit, and how does it help businesses?
Trade credit allows businesses to buy now and pay later (usually within 30–90 days), helping with cash flow and reducing upfront costs.
What are grants, and why are they beneficial?
Grants are financial support from the government or organizations. They do not need to be repaid, making them a valuable funding source for startups and small businesses.
