2.1.2 - external finance

external finance sources

family/friends, banks, peer to peer funding, business angels, crowdfunding, other businesses

how external finance is provided

loans , share capital, venture capital, overdrafts, leasing, trade credit, grants

benefits of family/friends financing

investment from people they know/trust them, repayment terms and conditions may be flexible

drawbacks of family/friends financing

amount may be limited, may place pressure on relationships

benefits of bank financing

specialised employees to give finance advice, structured, repayment plans, access to larger loan amounts, retaining business ownership

drawbacks of bank financing

strict eligibility criteria, lengthy application process, debt burden, potential collateral requirements, limited flexibility

advantages of p2p funding

easy access to funding, competitive interest rates, flexible as unsecured loans (no collateral)

disadvantages of p2p funding

credit risk, less protection, no guarantee of an investor match, only done online, risks of p2p site going bust

business angels advantages

may offer support/expertise, access to capital, flexible investment terms, validation of business potential, increased credibility, network access

business angels disadvantages

high risk as business not established, angels want high potential for reward, loss of control as angels want share of ownership sometimes, higher expectations, potential interference, pressure to grow

advantages of crowdfunding

avoids bank loan costs/interest, fast method of raising capital, form of free marketing, creates early customer base/engagement

disadvantages of crowdfunding

false positives could set up future failure for businesses, may miss funding target, high time commitment, risk of intellectual property theft

advantages of funding from other businesses

can help support businesses, can help gain higher potential return, can help to establish a supplier

disadvantages of funding from other businesses

money may be insufficient, can require quick action, may have different visions for the business

loans

a set amount of money provided for a specific purpose, to be repaid with interest, over a set period of time

loan advantages

quick and easy to secure, fixed interest rates allow firms to budget

improved cash flow, the borrower retains ownership of the company

loan disadvantages

interest must be paid regardless of financial performance, often more expensive than other forms of finance, can be charged a penalty for early payment, a firm that is highly geared may be seen as high risk

share capital (long term)

finance raised from the sale of share (equity capital)

share capital advantages

only need to pay dividends if a profit is being made and the amount of dividends is not fixed, possible to raise large amount of capital, no interest repayment

share capital disadvantages

loss of ownership (shareholders are part owners), potential risk of hostile takeovers, costly + complex process of issuing shares

venture capital (long term)

investment from one business to another in return for a percentage equity in the business

venture capital advantages

potential for large sums of money, expertise to help the business, makes it easier to attract other sources of finances, provides the required capital for expansion

venture capital disadvantages

long/complex process, expert financial projection are to be required, initially expensive for the firm, partial loss of ownership, risk of conflict or percieved interference

overdraft (short term)

the facility to overspend on a current account up to an agreed sum

overdraft advantages

only borrowed when required so flexible, only pay for money borrowed, quick/easy to arrange, no charges for paying off overdraft

overdraft disadvantages

the bank can call it in at any time, interest payments tend to be variable

leasing (long term)

allows a business to benefit from the use of asset without owning or buying it outright

trade credit (short term)

paying suppliers a period of time after the goods/services have been recieved

grants (long term)

fixed amounts of capital provided to businesses, by the government or other organisations it fund specific projects

conditions of grants

locate in very deprived area, provide employment, support good cause, reduce negative environmental impacts