2.1.2 external finance

how can banks be external finance?

• banks may lend a loan to a business to start-up or growth

• banks may also provide a business with an overdraft to help when they have cash flow problems

what is peer to peer funding?

• p2pl

• these are unsecured loans without going through a bank

• e.g. student loans, payday loans, debt factoring, lease agreements

what are business angels?

• angel investing is equity finance

• makes use of their personal disposable finance and makes their own decision about making the investment

• usually take shares in the business in return for providing equity finance

• seek to have a return on their investment over a period of 3-8years

• angels can invest on their own or with a group of people

what is crowd funding?

• a large number of people fund a project over the internet making small investments each

• 3 ways to fund; donate, lend, invest

• donate - no money back, but rewards like tickets or a newsletter

• lend - get money back with interest and satisfaction of contributing to success of a small business

• invest - invest in a business in exchange for equity or shares which may increase in value

what is a bank loan?

• loaning money from a bank is like renting the money

• banks will lend to small businesses but may not lend when they first start-up as there is no track record or history of them making money

• quick to set up

• loans are affected by interest rates

what is overdraft?

• some months a business may need extra cash to tide it over until a better month

• an overdraft may be organised by the bank which is short term lending of smaller amounts of money

• once its arranged on an account a business can dip into it or pay it back as they see fit

what is ordinary share capital?

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

• this is an external and long term method of finance but would only apply to a large business with a plc after its name

what is venture capital?

• also known as private equity finance

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

• will typically invest at least £50,000 in a small region business although this can rise into millions of pounds

what is a lease?

• as a business grows it may decide that it needs some more vehicles or equipment

• they may decide to lease so that the equipment can be updated regularly

• they will never own the equipment but will get the option to change it when it wears out

what is trade credit?

• when one business trades with another they will sometimes need to buy goods with trade credit

• the seller gives the buyer 30, 60, 90 days to pay

• the buyer then has time to sell the goods in their own shop before they have to pay for them

• the wholesaler may give the buyer a discount when they use cash instead

what are government grants?

• the government or the European Union provides financial help to businesses in some areas of the country, in an effort to overcome problems of unemployment

• government grants do not normally have to be repaid and owners keep full control of their business

what are the advantages of government grants?

• don’t have to pay it back

• don’t have to pay interest on it like a loan

• won’t lose control of your business

what are the disadvantages of a government grant?

• have to find a grant that suits your specific project, which can be difficult

• there’s a lot of competition for grants

• usually be expected to match the funds you’re awarded

• grants are usually awarded for proposed projects, not ones that have already started

• application process can be time-consuming