2.1.2 - External Finance

Question 1

What is the difference between a Source of Finance and a Method of Finance?

Answer 1

Source - where the finance has come from

Method - the use of a finance

Question 2

What are 6 Sources of External Finance?

Answer 2

1) Family and Friends
2) Banks
3) Peer to peer funding
4) Business angels
5) Crowd funding
6) Other businesses

Question 3

What are the 2 Advantages of the Source of Finance FAMILY AND FRIENDS?

Answer 3

• loans probably be Offered Without the Need for Security and at Lower Rates
• Unlikely to need a Business Plan, may not need to write one

Question 4

What are the 2 Advantages of the Source of Finance BANKS?

Answer 4

• Lend to business Without Asking For a % of the Ownership
• Allow the Business Owner to Continue Running the Business their Own Way

Question 5

What are the 2 Disadvantages of the Source of Finance FAMILY AND FRIENDS?

Answer 5

Could cause TENSION and problems if FINANCE ISN’T REPAID or if the business doesn’t flourish
Could also DEMAND money back at SHORT NOTICE

Question 6

How are Banks a source of Finance?

Answer 6

May lend a LOAN to a business to START UP or when a business wants to GROW and EXPAND
May provide a business an OVERDRAFT to HELP CASH FLOW PROBLEMS

Question 7

What are the 2 Disadvantages of the Source of Finance BANKS?

Answer 7

LOANS can be EXPENSIVE compared to other sources

May be HARD for a NEW business owner to OBTAIN a LOAN as they have no historical data

Question 8

What does the source of finance Peer to Peer funding involve?

Answer 8

Involves raising a loan from a group of individuals or institutions
Very FLEXIBLE source of borrowing

Question 9

What are the 1 Advantages and 2 Disadvantages of the Source of Finance Peer to Peer Funding

Answer 9

+ Businesses can get access to funding within a week once approved

• P2P loans are classified as private business loans
• If there’s not enough individuals interested or willing to invest in loan, you May not be Able to Acquire Entire Amount a Business Needs

Question 10

What is the Source of finance BUSINESS ANGELS?

Answer 10

they’re WEALTHY, entrepreneurial INDIVIDUALS who PROVIDE CAPITAL in RETURN for a PROPORTION of the COMPANY EQUITY

Question 11

What are the 2 Advantages of the Source of Finance BUSINESS ANGELS?

Answer 11

Angels are free to make investment decisions quickly

Owner will have NO REPAYMENTS or INTEREST on the money lent

Question 12

What is the 1 Disadvantage of the Source of Finance BUSINESS ANGELS?

Answer 12

OWNER NEEDS to GIVE UP a SHARE of the BUSINESS

Question 12

What is the 1 Disadvantage of the Source of Finance BUSINESS ANGELS?

Answer 12

OWNER NEEDS to GIVE UP a SHARE of the BUSINESS

Question 13

What is the Source of Finance CROWD FUNDING?

Answer 13

where a large number of people FUND a PROJECT over the internet making small investments each

Question 14

Describe the 3 ways to fund through CROWD FUNDING

Answer 14

DONATE: no money back, but rewards like tickets
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

Question 15

What are the 3 Advantages of the Source of Finance CROWD FUNDING?

Answer 15

+ GOOD ALTERNATIVE to loans for SMALL BUSINESS owners
+ Finance can be obtained WITHOUT PAYING UPFRONT FEES
+ Business can GENERATE FUNDS and also PROMOTE at the SAME TIME

Question 16

What are the 1 Disadvantage of the Source of Finance CROWD FUNDING?

Answer 16

• Business will need to SHOWCASE their idea investors and may need to put together a video and other promotion to ATTRACT INVESTORS

Question 17

What are 7 Methods of External Finance?

Answer 17

1) Loans
2) Share Capital
3) Venture Capital
4) Overdrafts
5) Leasing
6) Trade Credit
7) Grants

Question 18

What is the Method of Finance, LOAN?

Answer 18

A FIXED AMOUNT from a bank, which is generally used to FINANCE LONG TERM ASSETS

Question 19

What is an advantage of the Method of Finance, LOANS?

Answer 19

+ As the loan is fixed for some time, the business OWNER can PLAN AHEAD and KNOWS exactly what the REPAYMENTS will be

Question 20

What are 2 Disadvantages of the Method of Finance, LOANS?

Answer 20

• INTEREST RATES
• a BANK will ASK for SECURITY or COLLATERAL on a loan, this may be a house or another asset that may be seized IF LOAN ISN’T PAID BACK

Question 21

What is the Method of Finance Share Capital?

what type of company would this only apply to

Answer 21

Money INVESTED in a COMPANY by the SHAREHOLDERS
Long Term
ONLY PUBLIC LIMITED COMPANY

Question 22

What are 2 Advantages of the Method of Finance, SHARE CAPITAL?

Answer 22

+ COST-EFFECTIVE, NO INTEREST

+ INVESTORS are often PREPARED to PROVIDE EXTRA funding as the business grows

Question 23

What is 1 Disadvantage of the Method of Finance, SHARE CAPITAL?

Answer 23

the More Shares Sold, the More the Profits have to be Divided Up and Paid Out to investors as Dividends

Question 24

How are Venture Capitalists a Method of Finance?

Answer 24

they INVEST LARGE sums of OTHER PEOPLE'S MONEY in a business IN RETURN for SHARES

Question 25

What are 2 Advantages of the Method of Finance, VENTURE CAPITAL?

Answer 25

+ USEFUL if business is looking to RAISE a LARGE AMOUNT of money in SHORT space of TIME + Business gets ALL SKILLS of the VENTURE CAPITAL BUSINESS, their network and links may increase revenue streams.

Question 26

What is 1 Disadvantage of the Method of Finance, VENTURE CAPITAL?

Answer 26

venture capitalists firms LOOK FOR a STRING BUSINESS PLAN , making it DIFFICULT, and for start ups

Question 27

What is the Method of Finance, OVERDRAFT?

Answer 27

SHORT TERM lending of SMALL AMOUNTS of money

Question 28

What are 2 Advantages of the Method of Finance OVERDRAFTS?

Answer 28

+ Businesses ONLY PAY INTEREST on the AMOUNT of money WITHDRAWN + Can be arranged with an INSTANT DECISION from the BANK on the phone or online

Question 29

What is 1 Disadvantage of the Method of Finance OVERDRAFTS?

Answer 29

- VERY EXPENSIVE, HIGH charges & INTEREST

Question 30

What is the Method of Finance, LEASING?

Answer 30

TEMPORARY TRANSFER of ASSETS

Question 31

What is 1 Advantage of the Method of Finance, LEASING?

Answer 31

+ LOWER MONTHLY COSTS for a business owner THAN a LOAN

Question 32

What is the Method of Finance TRADE CREDIT?

Answer 32

amounts OWED to SUPPLIERS of a business | 30, 60, 90 days to pay

Question 33

What are 2 Advantages of the Method of Finance TRADE CREDIT ?

Answer 33

+ NO INTEREST + Businesses that PAY REGULARLY ON TIME can build relationships with suppliers and secure BETTER DEALS

Question 34

What is 1 Disadvantage of the Method of Finance - TRADE CREDIT ?

Answer 34

- IF the business owner DOESN'T PAY IN TIME they risk being REFUSED FUTURE CREDIT by the supplier in the FUTURE

Question 35

What is the Method of Finance GRANTS?

Answer 35

sum of MONEY provided by the GOVERNMENT to a business that doesn't have to be repaid owners keep full control

Question 36

What are 2 Advantages of the Method of Finance, GRANTS?

Answer 36

+ usually DOESN'T have to be PAYED BACK + NO INTEREST

Question 37

What is 1 Disadvantage of the Method of Finance, GRANTS?

Answer 37

- a LOT of COMPETITION FOR GRANTS | application process can be very complex and time-consuming.