External finance 2.1.2 Flashcards
(28 cards)
Define external finance.
Money sourced from outside the firm to fund it.
What are the 6 main sources of external finance?
Business angels
Family and friends
Banks
Peer-to-peer funding
Crowdfunding
Other businesses
What is a business angel?
A private individual, often with a high net-worth, and usually with business experience, who directly invests part of their assets in new and growing private businesses.
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 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?
The amount may be limited.
May place pressure on relationships.
What is crowdfunding?
Crowdfunding involves raising finance from a large number of people and the amounts of money can vary.
What are advantages of crowdfunding?
Can receive customer feedback.
Fast way of raising finance.
Gets media attention.
What are disadvantages of crowd funding?
Campaign may not succeed.
Doesn’t work for all businesses.
Someone can steal your idea.
What are the 7 main methods of finance?
Loans
Share capital
Venture capital
Overdrafts
Leasing
Trade creditors
Grants
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 (A sum of money paid regularly, typically annually by a company to its shareholders out of its profits) 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 or 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?
- Overall cost of financing is expensive.
- Founder ownership is reduced.
- Funding Is Relatively Scarce & Difficult to Obtain.
- This may lead to split control is there are disagreements.
What is an overdraft?
A deficit in a bank account caused by drawing more money than the account holds.
What are the advantages of using overdraft?
Gives you immediate access to extra funds when you don’t have any left.
Flexible- can change the amount borrowed.
Interest is only paid on amounts borrowed.
What are the disadvantages of overdrafts?
Cannot be used for large borrowing.
Rates of interest higher than loans.
Bank can change limit at any time or ask for money to be paid back sooner than expected.
What is leasing?
A way of renting an asset that the business requires. Monthly payments are made and the leasing company is responsible for the provision and upkeep of the leased item.
What is trade credit?
An arrangement to buy goods and/or services on account without making immediate cash or cheque payments.
What are the advantages of trade creditor?
Can prevent buyers from looking elsewhere and strengthens the supplier-buyer relationship.
