2.1.2 external finance

family and friends

• selling shares to friends and families

• adv: loans will be offered without the need for security and at lower rates and over longer terms, unlikely to need a business plan

• disadv: may cause tension and problems if finance is not repaid, may demand for money back at short notice

bank loans

• adv: will lend without asking for a share of the ownership, owner still has full control of business

• diadv: can be expensive, interest must be paid back on time, owner may need to use their own assets as security for the loan

bank overdraft

• facility to overspend on a current account up to an agreed sum

• adv: quick fix method to tide the business, can be arranged quick and easy, only pay interest on the amount they are overdrawn

• disadv: if business goes over overdraft amount the business will be charged heavily, expensive and high charges and interest rates, not suitable for large amounts over a long period of time

peer to peer funding

• matches businesses that need finance with investors who are looking for a good return on their investment

• adv: quick access to funding, can apply online, investors can expect returns of 6-7% wheras savings account might only give 3%

• disadv: if there are not enough individuals interested or willing to invest in your loan, you may not be able to acquire the entire amount the business needs

business angels

• offers to lend their personal disposable finance

• adv: owner gets access to investors sector knowlegde and contacts, owner gets access to angels mentoring and managment skills, no repayments or interest pay

• disadv: not suitable for investments below 10k or more than 500k, owner need to give up a share of the business

crowdfunding

• large number of people fund a project over the internet

• adv: good alternative to loans for small businesses, finance can be obtained without paying upfront fees, business can generate funds and also promote the business at the same time

• diadv: business needs to show their idea to investors to attract investors

share capital

• in a public limited company, thy can raise more finance to expand by having an ordinary share issue

• adv: investors are often prepared to to provide extra funding as business grows, no interest pay

• disadv: may reqiure alot of background info, more shares = more profits divided to pay investors, expensive and slow process to organise

venture capital

• invest large sums of other peoples money in a business in return for shares in the company

• adv: useful if business is looking to raise alot of money in a short time, business gets all their skills and their network may increase revenue streams

• disadv: firms typically want 20-30% stake in business

leasing

• adv: lower monthly cost than a loan, can be arranged without any advanced fees, leasing firm maintains the equipment so business will always have a reliable working equipment

• disadv: difficult to get out of contracts as its over a fixed term

trade credit

• when businesses trade with each other they may buy goods without cash upfront and instead in a period of time

• adv: business can sell the goods before stock needs to be paid for so can make profit before costs have to be paid, no interest pay, can build relationships and secure better deals

• disadv: not all stock is available to buy using trade credit, if business doesnt pay in time they risk being refused further credit by supplier in future

government grants

• financial help to businesses in an. efoort to overcome problems of unemplyment

• adv: dont have to pay back grant, no interest pay, full. control of business

• disadv: lots of competition for grants, application process is vey complex and time consuming