Business unit 2 chapter 25 external finance

Friends and family

Friends and family are people known to the business .

Friends and family adv and disadv

Adv: cheap source of finance, usually low or no intetest rates

Might be a gift

Disadv: tends to be small amounts

Can damage relationships

Peer to peer lending

An individual loans money to another individual, usually done through an online transaction

Business angels

Wealthy individuals who invest between 10,000 and 100,000 pounds into a business for sole stake in the business

Crowd funding

Individuals lend money to businesses and project that they are interested in, mostly done online

Loan

A loan is an arrangement where the amount must be returned over a fixed period of time .

Loan Advantages Disadvantages

Advantages: can be arranged quickly, owners still have full control, repayment is spread out, exact amount needed

Disadvantages: interest is charged, repayments must be made even if the company isnt making money, some businesses might have a hard time getting one

Types of loans

Bank loan + mortgage

Share capital

This is money raised from the sale of shares of a public or private limited company It is also called equity capital . All businesses sell shares to begin , but can sell more shares ( up to the legal limit ) later in the life of the business .

Share capital advantages and disadvantages

Advantages: permanent finance so doesn't need to be repaid, cheaper than a loan, can raise large amounts of money

Disadvantages: need to pay shareholders dividends, could lose some part of the company, can only be done by public and ltds

Venture capital

Venture capital

Financial capital provided by investors to hugh risk and potential high reward firms or startups

Venture capital adv and disadv

Adv: available to businesses that find it difficult to get money elsewhere, raise large sums, fairly quick

Disadv: may have terms that are not fsvorable to the business, may have to give up large amount of control of the company, usually only for new businesses

Bank overdraft

A lending institution allows a firm to withdraw more money that it currently has in its account.

Bank, overdraft advantages, and disadvantages

Advantages: it is a very flexible source of finance, good for short-term, cash flow problems, only pay interest on the amount of the overdraft

Disadvantages: must pay interest on the overdraft, the bank can ask for the money back at short notice, usually high interest rates

Leasing

A business enters a contract with the leasing company to acquire or use particular assets, such as machinery, equipment, or property

leasing adv and disadv

Advantages:

Periodic or monthly payments are made, a large amount of capital is not needed to purchase an asset, useful for one assets are only required for short periods of time or occasionally

Disadvantages:

Leasing can be more expensive than purchasing outright and cannot be used as collateral for loans, can only be used for certain items, item does not belong to the business

Trade credit

An agreement between businesses that allows the buyer of goods or services to pay the seller at a later date. The business must pay between 30 to 90 days.

Trade credit adv and disadv

Advantages:

Do not need to pay interest, helps businesses with cash problems

Disadvantages: may lose discounts for not paying quickly or in cash, can cause conflicts with supplier of the payment is delayed, can only be used for certain goods

Grant

funds provided by the government, a foundation or a trust where business are expected to write a proposal showing how they will use the money

grant adv and disadv

advantages: does not need to be repaid

disadvantages: very selective, not very flexible, money must be spent how you stated it would