External Finance

• external finance?


  sourced from outside of the business
• source of external finance:

  • other business
  • crowdfunding
  • business angels
  • peer-to-peer
  • banks
  • family and friends
• business angels?


  individuals making investments in start-up/expanding businesses
• peer-to-peer?


  loan where large number of private investors lend to a business
• crowdfunding?


  allows businesses to access finance provided by a large number of small investors on online platforms
• other business as a source of finance?

  can access finance via a joint revenue with another business.

  large businesses buy shares in other companies as an investment
• advantages of using other businesses as a source of finance?

  • can access large amounts of finance
  • provide access to business processes and market knowledge alongside finance
• disadvantages of using other businesses as a source of finance?

  • profit needs to be shared between businesses
  • decisions need to be agreed by all businesses involved
• advantages of using crowdfunding as a source of finance?

  • creates organic customer base
  • platform provides a form of free marketing
  • good credit rating is not required
• disadvantages of using crowdfunding as a source of finance?

  • persuasive business plan is needed - competition
  • negative publicity is project if unsuccessful in attracting enough crowdfunding capital
• advantages of using business angels as a source of finance?

  • more willing to take risk than banks
  • offer advice + guidance
  • investment is for a period of time - owners regain shares in the future
• disadvantages of using business angels as a source of finance?

  • finding 'right' business angel is challenging
  • involved in decision-making
  • will receive a share of business profits
• advantages of using peer-to-peer funding as a source of finance?

  • loans available very quickly
  • 'no strings' attached
• disadvantages of using peer-to-peer funding as a source of finance?

  • charged small fee to access finance
  • have to pay interest
• advantages of using banks as a source of finance?

  • offers short + long term finance
  • free advice + guidance to businesses
  • small sums borrowed from unsecured
• disadvantages of using banks as a source of finance?

  • business plan required
  • banks are cautious towards new businesses
  • interest/arrangement fee is payable
  • must be customers of bank
  • security provided to be granted a loan
• advantages of using family & friends as a source of finance?

  • cheap sources of funds
  • 'no strings' attached
  • flexible terms
• disadvantages of using family & friends as a source of finance?

  • relationship may be damaged if finance is not repaid
• methods of finance:

  • grants
  • loans
  • venture capital
  • trade credit
  • overdrafts
  • share capital
  • Leasing
• how is leasing a method of finance?


  asset used by business in return for regular payments
• benefits of leasing?

  • business does not own asset during period of lease
  • not responsible for maintenance/repair costs
• drawbacks of leasing?

  • more expensive than buying an asset
• how is share capital a method of finance?

  • finance raised from sale of shares in a limited company
  • shareholders are owners of shares
• benefits of share capital?

  • large amounts of capital can be raised
  • interest is not payable on finance raised in this way
• drawbacks of share capital?


  shareholders have a say in decision making
• how are debentures a method of finance?

  • agreements between business and lender to repay certain amount
  • holders are creditors rather than owners of a business - do no hold voting rights
• benefits of debentures?

  • control over decision-making is retained
  • interest is fixed, aiding budgeting
• drawbacks of debentures?

  • interest is higher
  • failure to repay may deter investors in the future
• how are mortgages a methods of finance?

  • are long-term secured loans - used by business to purchase buildings, lands + large items of capital equipment
• benefits of mortgages?

  • can purchase expensive property without the need for large amounts of capital
• drawbacks of mortgages?

  • missed payments - property being repossessed
  • repayments are variables + linked to the current interest rate, making budgeting difficult
• how are loans a method of finance?

  sum of money borrowed + repaid banks loans are unsecured
• benefits of loans?

  • interest rate is fixed
  • repayments are made in equal instalments, helping budgeting
• drawbacks of loans?

  • interest rate depends on business credit rating
  • non-current liabilities are increased in the balance sheet
• how are overdrafts a method of finance?

  • an arrangement for business current account holder to spend more money that it has in their account
  • limit is agreed and interest is charged only when a business 'goes overdrawn'
• benefits of overdrafts?

  • short-term source of finance that offers flexibility and aids cash flow
• drawbacks of overdrafts?

  • may be 'called in' if bank is concerned about a business's ability to repay what it owes
• how are venture capital a method of finance?

  funds provided by specialist investors in businesses that have potential for growth
• benefits of venture capital?


  businesses that have refused finance from other sources may be able to attract investment from less risk-averse venture capitalists
• drawbacks of venture capitals?

  • requires a stake in business
  • expect to exert some control over business