Theme 2.1.2: External Finance Flashcards
External Finance
Finance that comes from outside the business
Examples of external finance
. Bank Loan . Government Grant . Family and Friends funds . Business Angels e.g Dragons Den . P2P lending (Peer to Peer) like Funding Circle . Crowd Funding e.g Kickstarter . B2B (business to business) finance
Advantages of external finance
. Large sums of money can be raised in a short period of time
. Can help gain better business expertise from using the likes of business angels
. Long time to re pay - usually 10 years
. With crowd funding investment can come from many people
. Fixed repayments
. Family and friends can be flexible
Disadvantages of external finance
. Most require some form of collateral so they know they will get their investment back, small businesses likely don’t have this
. Interest has to be paid on loans so are more expensive
. Risky so there can be a chance you will loose everything depending on the business structure
. Repayments can impact the cash flow of the business
Long term loan
A sum of money given to a business to cover large expenses such as expansion usually payed back over around 10 years with low interest
Short term loans
A sum of money given to cover small day to day expenses for example for one month of the year you accidentally overspend on materials so need to take out a loan to cover the cost of wages. These usually have very short repayment times and high interest
What is Collateral?
Refers to assets that can be used to repay the lender in case the borrower is unable to cover debts
Bank Loan Evaluation
Good because: . Large sums of money . Easy to plan for fixed repayments Bad because: . Hard to gain . Interest . May need collateral
Family and Friends Evaluation
Good because: . Flexible . May be interest free . Low rates usually . Usually long repayments Bad because: . Possible damage relationship . May loose money . May want involvement
