2.1.2 external finance

Debt Finance

Involves borrowing money that must be paid back over time, usually with interest.

Bank Loans

A fixed sum of money borrowed from a bank, to be paid back in installments over an agreed period with interest.

Advantages of Bank Loans

Large sums can be borrowed; repayments are predictable.

Disadvantages of Bank Loans

Interest payments add to the cost; risk of default exists.

Overdrafts

A short-term borrowing facility allowing a business to withdraw more money than it has in its account.

Advantages of Overdrafts

Flexible for managing short-term cash flow issues; can be accessed quickly.

Disadvantages of Overdrafts

High-interest rates compared to loans; potential for debt accumulation.

Bonds

Loans from investors that a business agrees to repay with interest over a fixed period.

Advantages of Bonds

Suitable for large-scale financing; clear repayment terms.

Disadvantages of Bonds

Regular interest payments create a financial burden; may affect reputation.

Equity Finance

Raising capital by selling shares or ownership stakes in the company.

Issuing Shares

A business sells shares of stock in exchange for investment capital.

Advantages of Issuing Shares

No repayment needed; attracts long-term investors.

Disadvantages of Issuing Shares

Loss of control; shareholders may expect dividends.

Venture Capital

Investment from external investors in exchange for equity, often providing mentorship.

Advantages of Venture Capital

Funds for high-growth potential businesses; offers expert guidance.

Disadvantages of Venture Capital

Loss of control; high expectations for returns.

Business Angels

Wealthy individuals investing their personal funds in exchange for equity or debt.

Advantages of Business Angels

Provide mentorship; may offer flexible terms.

Disadvantages of Business Angels

Partial control over business decisions.

Grants and Subsidies

Non-repayable funds given to businesses to support specific projects.

Advantages of Grants and Subsidies

No repayment obligation; fosters innovation.

Disadvantages of Grants and Subsidies

Highly competitive; specific conditions may apply.

Crowdfunding

Raising small amounts from a large number of people via online platforms.

Advantages of Crowdfunding

Access to large pools of investors; serves as a marketing tool.

Disadvantages of Crowdfunding

Not guaranteed funding; can be time-consuming.

Trade Credit

A business purchases goods/services and pays later, usually interest-free.

Advantages of Trade Credit

Improves cash flow; typically no interest if paid on time.

Disadvantages of Trade Credit

Late fees may apply; limited to specific suppliers.

Advantages of External Finance

Allows larger funding; access to expertise.

Disadvantages of External Finance

Repayment obligations for debt; possible loss of control.