external finance - methods

methods of external finance

loans, shared capital, venture capital, overdrafts, leasing, trade-credit, grants

what is a loan

money borrowed from a lender that you agree to repay over time, usually with interest

pros of loans

as is fixed for a length of time business owner can plan ahead, helps manage fixed costs, straightforward process

cons of loans

will charge interest, not very flexible, need collateral ie an asset if not paid back

what is floatation

when a private limited company where shares are available by invite only becomes a public limited company so shares are available to all

what is share capital

the total value of money a company raises by issuing shares to its shareholders in a public limited company

how much capital is needed for a company to go onto the LSE in UK

£500,000

pros of share capital

investors are prepared to provide extra funding as the business grows, more cost effective way to raise finance than a loan with no interest to pay back

cons of share capital

potential investors may require a great deal of background info before they buy the shares, more shares that are sold the more the profits have to be divided up, slow and expensive to organise

what is venture capital

finance provided by private investors and investment banks to start-up companies with long-term growth potential

pros of venture capital

business gets benefit of skills of the investors and their networks which may increase revenue streams, for owners that have been refused loan from bank

cons of venture capital

venture capital firms look for strong business plans which can be difficult to provide, typically investors want 20-30% share in the business

what is an overdraft

a quick short term loan with high interest rates

pros of overdrafts

quick fix method to tide the business over a difficult month of trading, can be arranged instantly online, business will only pay interest on the amount of money that they are overdrawn, easily pay back and interest charges stop

cons of overdrafts

if business goes over a certain amount the overdraft will be unauthorised and then is charged heavily, very expensive source of finance, very high charges and interest rates, not suitable for large amounts over long period of time

what is leasing

a long‑term agreement to use an asset in exchange for regular payments, without taking full ownership of it and can change it when it wears out

pros of leasing

lower monthly costs for a business owner than a loan, can be arranged without any advanced fees being paid, maintain equipment so the business will always have reliable working equipment

cons of leasing

leasing is often over a fixed term so is a problem if the business changes its mind and wants to lease from a different company, contracts may be difficult to get out of

what is trade credit

when a supplier allows a buyer to purchase goods or services on credit, with payment deffered to a later date

pros of trade credit

business can sell goods before the stock needs to be paid for so can make a profit before needing to pay, no interest has to be paid on trade credit, by paying regularly on time this builds relationship to secure better deals

cons of trade credit

not all stock is available to buy with trade credit so only applies to certain industry, if business does not pay on time they risk being refused further credit in future

what is a grant

government provides financial help to business in effort to overcome unemployment, not normally have to be repaid

pros of a grant

not need to pay grant back, reduce fixed costs enabling growth, no interest to pay, no loss of control of the business

cons of grants

difficult to find a grant that suits the project, lots of competition, may be expected to match the funds they are awarded, time consuming application process