Business external finance

Family and friends advantages

• Cheaper (little to no interest)

• Flexible repayment methods

• Faster access

Family and friends disadvantages

• May damage repayments if failure to pay

• No formal agreement may create confusion

• Limited funding

Peer to peer lending

Where individuals lend to other individuals without prior knowledge of them on the Internet

Peer to peer lending

• Easier access than bank loans

• Competitive interest rates

• Lenders do not gain control

• Build credit profile of successful repayments are made

Peer to peer lending disadvantages

• Platform fee

• Failure to repay may harm reputation

• Should be repayed

Business angels

Individuals who invest money in a business in exchange for a stake in the business

Advantages of business angels

• Large amounts

• Specialist advice

• No interest repayment

• Improves credibility if bs has a highly reputable business angels n

• Business angels are willing to take risks

Disadvantages of business angels

• Loss of control

• Profit shared

• Conflicts may occur

Crowdfunding

Where a large number of individuals invest in a bs or project on the Internet avoiding the use of a ba

Advantages of crowdfunding

• No Interest repayments

• Can see feedback

• Marketing

• Faster method of rasing finance

• Retains control

Disadvantages of crowdfunding

• Time consuming

• Platform fee

• Competitors may steal ideas

• Uncertain outcome

Bank loan advantages

• Large amounts

• Long term

• Predictable cost

• Formal agreement around confusion

Disadvantages of bank loans

• Interest

• Time consuming

• Repayments

Mortgage

Are secured loans where the borrower has to provide some assets as collateral to support the loan

Mortgage advantages

• Long repayment period

• Low interest

• Predictable cost

• Retain ownerships

Disadvantages of mortgage

• Risk of losing assets

• Long term commitment

• Interst

• Repayment

Debenture

Is a long term loan taken out by a company usually secured against company assets and paying a fixed rate of interest

Advantages of debenture

• No loss of control

• Predictable cost

• Long term

• Large amounts raised

Disadvantages of debenture

• Interest must be paid

• Assets may be used as security

• Repayment

Share capital

Money introduced into the business through the sale of shares

Share capital adv

• Large amounts raised

• No interest payments

• No repayments required

• Improves cash flow

Disadvantages of share capital

• Loss of ownership

• Dividends have to be paid

• Risk of takeover

• Expensive legal fees

• Financial info made public

Venture capitalist

Providers of funds to small or medium businesses or companies which may be considered too risky for other investors

Advantages of venture capitals

• Large amounts invested

• No interst

• Specialist advice

• Have ideas innovation

• Good venture capitalist increase credibility

Venture capitalist disadvantages

• Loss of ownership

• Profit shared

• Time consuming

• Conflicts

Bank overdraft

An agreement between a business and a bank that allows a business to spend more money than it has in the accounts

Bank overdraft advantages

• flexibility (can use only what it needs )

• no loss of ownership

• quick access to funds

• interest charged only on the amount used

bank overdraft disadvantages

• High interest rates

• there is a limit

• requires a good trade credit history

• bank can ask for the overdraft in any short period of time.

Leasing

Where a business rents an asset from a leasing company for regular payments instead of buying it outright.

advantages of leasing

• No high initial cost (improves cash flow )

• leasing company will cover repair and maintenance cost

• most up to date equipment provided from the hire company

• no owner ship risks (depreciation lies with the lessor)

Disadvantages of leasing

• regular payments need to be made

• usage restrictions less flexibility

• long term commitment

• total payments may exceed purchase price.

Trade credit

where supplier allows a business to purchase goods but pay later.

advantages of trade credit

• goods can be sold before repayment - better cash flow

• no interest payments if paid on time (cheaper than obtaining a bank loan)

• easy to arrange - no complex paper work

• flexibility is high

disadvantages of trade credit

• late payment will mean that interest will have to be paid

• may damage supplier relationship

• poor credit history may ruin reputation

Grants

Government and industry trusts may offer grants to businesses.

Advantages of grants

• no repayments required

• no interest payments improves profitability

• improves cashflow

• innovation will increase

disadvantages of grants

• uncertain amount

• time consuming application process

• monitoring and reporting requirements

• difficult to obtain