External Sources of Finance

What is trade credit?

Goods can be purchased and paid for at a later date (usually within 30 days).

What are the advantages of trade credit?

• No interest charges if paid in time.

• Preserves working capital, keeping cash free for daily expenses such as payroll.

What are the disadvantages of trade credit?

• Missing deadlines triggers high interest charges.

• Accepting credit often means forfeiting early-payment cash discounts.

What is a hire purchase?

Paying to use an asset in instalments.

Once all instalments are paid you own the asset.

What are the advantages of a hire purchase?

• Can start using machinery or vehicles straight away without waiting to save.

• Spreads high costs into fixed instalments, leaving working capital free for daily operations.

What are the disadvantages of a hire purchase?

• Business doesn’t own the asset until final payment is made.

• Interest charges mean the total amount paid is higher than buying outright.

What is leasing?

Paying to use an asset in instalments.

Ownership of the asset remains with the supplier.

What are the advantages of leasing?

• Low upfront cost - no large capital sum or deposit is needed right away.

• Businesses can easily replace or upgrade old equipment when the lease ends.

What are the disadvantages of leasing?

• Business never owns the asset and must be returned at end of agreement.

• Strict terms mean they can’t be cancelled early to upgrade equipment.

What are grants?

Money provided to a business for a specific purpose.

This doesn’t have to be repaid.

What are the advantages of grants?

• Don’t have to be paid back.

• Free cash flow helps fund projects without risking core capital.

What are the disadvantages of grants?

• Competitive as many businesses apply for same limited pool of funding.

• Success is not assured even after investing significant time in applying.

What is venture capital?

An experienced entrepreneur invests in return for a stake in the business.

What are the advantages of venture capital?

• Access to large amounts of capital (often over 250,000).

• Shared risk as investors become part-owners rather than demanding repayments regardless of performance.

What are the disadvantages of venture capital?

• Owners must surrender some shares to the investor.

• Owners spend time meeting investor demands rather than running daily operations.

What is crowd funding?

Involves attracting investment from a large number of speculative investors, many of whom may invest relatively small amounts.

What are the advantages of crowd funding?

• It does not charge interest unlike bank loans.

• Early backers often become loyal and invest repeatedly.

What are the disadvantages of crowd funding?

• If target amount is not fully reached, the business usually gets no money at all.

• Crafting pitches and marketing campaigns requires extensive preparation.