2.1.2 External Finance By Az Flashcards
(27 cards)
What is external finance ?
External finance is capital raised from outside the business
Name three sources of external finance?
Banks
Family and friends
Business Angels
Name three methods of external finance?
Loans
Overdrafts
Leasing
What is the advantage of using family and friends as a source of finance?
An advantage would be that repayment time can be flexible.
What are the disadvantages of using family and friends as a source of finance?
Amount may be limited.
May place pressure on relationships.
What is Peer-to-peer funding (P2P) ?
An individual lending you money whom you have no relationship or contact to.
What are business angels?
Wealthy individuals that make a personal investment into the start up of the business for a share of the business.
Why might it be a bad idea for a business angel to invest money into a new business?
It could be a bad idea as the business Angel would be investing their money into an un-established business.
What is crowdfunding?
Crowdfunding involves raising finance from a large number of people and the amounts of money can vary.
What are the advantages of loans?
Improves cash flow
Borrower retains ownership of the company.
Quick and easy to secure
What are the disadvantages of loans?
Interest must be paid regardless of financial performance.
Can be charged a penalty for early repayments
What is share capital?
Finance raised from sale of shares
What are the advantages of share capital?
No interest repayments.
Only need to pay dividends if a profit is being made.
Possible solution to raise large amounts of finance.
What are the disadvantages of share capital?
Loss of ownership as shareholders are part owners.
Risk of loss of control for a Plc which could lead to a hostile takeover.
What is venture capital?
Investment from an established business for a share in the business
What are the advantages of venture capital?
Expertise to help the business
Provides the required capital for expansion
Potential for large amounts of money to be invested
What are the disadvantages of venture capital?
Loss of ownership
Risk of conflict and interferences
A long and complex process
What is an overdraft?
An overdraft is the facility to overspend on a current account up to an agreed sum
What are the advantages of using overdraft?
Quick and easy to arrange
Only borrowing when required allowing flexibility
What are the disadvantages of overdrafts?
The bank can call it in at any time
Only available from a current bank account
What is leasing?
Leasing is when a business pay a set amount in instalments to borrow an asset for pre determined period of time.
What is trade credit?
Trade credit is paying suppliers after a period of time after the goods have already been received before payment.
What are the advantages of trade credit
No interest payments
No loss of business ownership
What are the disadvantages of trade credit?
No additional finale is being raised
You might have to pay more for the goods from the original price agreed due to later payment
