2.1.2 External Finance Flashcards
Definition of external finance
Finance sources outside the business
What are the 6 external sources of finance?
- Family and friends
- Banks
- Peer-to-peer lending
- Business angels
- Crowd funding
- Other businesses
Family and friends as a source of finance
- no interest to pay
- can’t interfere with business
- could demand money back at short notice
- cause tension
Banks as a source of finance
- banks lend to businesses without asking for ownership
- expensive
- difficult for new businesses as they have no historical data
Peer to peer funding as a source of finance
- business owners can apply online
- if there’s not enough individuals to invest in your loan, you may not be able to get the amount the business needs
Definition of business angels
Individual who invests part of their assets in a new and growing business.
Business angels as a source of finance
- no interest to pay
- angels can make investment decisions quickly
- owner gets access to angles’ management skills
- owner needs to give up a share of the business
- not suitable for investments below £10,000 and above £500,000.
What is crowd funding?
Where a large number of people fund a project over the internet, making small investments each, 3 ways to fund:
- Donate
- Lend
- Invest
Crowd funding as a source of finance
- promotes the business
- finance can be obtained without paying upfront fees
- business may have to make a video (promote) to attract investors
What are the 7 methods of finance?
- Loans
- Share capital
- Venture capital
- Overdrafts
- Leasing
- Trade credit
- Grants
Definition of share capital
The money a business raises through the sale of ordinary shares.
Definition of venture capital
Large amounts of capital invested by private investors usually in return for shares.
Definition of overdrafts
A loan provided by a bank that allows a customer to pay for bills and other expenses when the account reaches zero.
Definition of leasing
