external finance - sources

define external finance

investment for the business that is obtained from; banks, investors and lenders outside the business

what is source of finance

where the finance has come from eg a bank

what is method of finance

use of a finance - or what use it would be suitable for eg loan to buy equipment for business

external sources of finance

family and friends, banks, peer to peer funding, business angels, crowdfunding, other businesses

source of finance: family and friends

can sell shares to those by invitation, private limited companies are able to raise finance by selling shares

pros of using friends and family as finance

don’t ask for collateral, lower rates and longer terms, not need a business plan,

cons of using friends and family as finance

arguments, demand for money back at short notice

source of finance: banks

lend to a business to start-up or when a business wants to grow and expand, can also provide an over-draft when they have cash-flow problems

pros of using banks as source of finance

owner retains control of the business, wont ask for a share of the ownership,

cons of using banks as a source of finance

expensive and interest needs to be paid on time, hard to obtain loan if have no historical sales data, may need to use owners own assets as security for the loan

define overdraft

flexible, short term loan with high interest rates

sources of finance: peer to peer funding

where private investors lend to a business via an online platform

pros of peer to peer funding as source of finance

can get access to funding within a week, investors can expect returns of 10%+ whereas savings account might give less, can apply online

cons of peer to peer funding as a source of finance

higher default risk, weaker protections than banks, and limited liquidity, which can expose both borrowers and investors to financial loss

sources of finance: business angels

offers to lend money to a business owner from their own finance, usually taking shares in the business, also bring experience and knowledge, return of investment over a period of 3-8yrs

pros of business angels as source of finance

angels are free to make investment decisions quickly, owner gets access to your investors sector knowledge, contacts and management skills

cons of business angels as sources of finance

not suitable for investments below £10,000 or more than £500,000, owner may have to share decision making with angel, hard to find suitable angels willing to invest

sources of finance: crowdfunding

a large number of people fund a project over the internet making small investments each, investors lend in return: for equity, rewards like goods, profit share

what is an all or nothing funding method

only get to keep funds if target is reached at the closing date, if funds arent received by certain date you get all your money back

pros of crowdfunding as a source of finance

good alternative to loans for small business owners, finance can be obtained without paying upfront fees

cons of crowdfunding as a source of finance

high risk of failing to reach your goal, the significant time and marketing effort required, and the financial and reputational consequences if you cannot deliver what you promised

sources of finance: other businesses

invest in startups, may have a surplus of profit and view this as a way to get a good return on investment, seen in IT or disruptive technology business

what is disruptive technology

a change in tech that allow lifestyle to change

what is trade credit

short‑term financing arrangement where a supplier allows a buyer to receive goods or services now and pay for them later, typically within 30-90 days

pros of other businesses as a source of finance

builds relationships if going into partnerships with other businesses, make the business look more trustworthy for investors and lenders

cons of other businesses as a source of finance

danger of complete takeover by other business, if business uses trade credit and ends up owing money to supplies may need to go into liquidation to pay them

what is liquidation

selling of a company assets to pay creditors and is its first steps to closure