External Finance

• Why does a business need sources of finance?

  To fund various business activities
• What is one reason a business needs finance?

  To buy materials for products
• What is another reason a business needs finance?

  To operate machinery in the business
• How does finance help with staff salaries?

  It allows businesses to pay their staff
• What is a purpose of external finance?

  To rent or purchase property
• What is external finance?

  Funds raised outside of the business
• What is an advantage of borrowing from family and friends?

  No interest on the borrowed money
• What is a disadvantage of borrowing from family and friends?

  It might not be enough money
• What is a bank loan?

  Money loaned by a bank with interest
• What is an advantage of a bank loan for established businesses?

  Good rates if seen as low risk
• What is a disadvantage of a bank loan?

  Must be paid back with interest
• What is interest?

  The cost of borrowing money
• What is a bank overdraft?

  Money spent beyond the account balance
• What is an advantage of a bank overdraft?

  Instant access improves cash flow
• What is a disadvantage of a bank overdraft?

  High-interest rates increase risk
• What is a mortgage?

  Money to pay off a property
• What is an advantage of a mortgage?

  Helps buy property with bank's help
• What is a disadvantage of a mortgage?

  Paying back a lot over many years
• Which source of finance would you use to fund a car for delivering pizzas?

  Bank loan
• Which source of finance would you use to refill stock levels of dough?

  Bank overdraft
• What is P2P lending?

  Peer-to-peer lending between individuals
• What is an advantage of P2P lending?

  Higher returns than savings accounts
• What is a disadvantage of P2P lending?

  High risk if the company fails
• What is venture capital?

  Investment from business angels in shares
• What is an advantage of venture capital?

  Provides advice and finance
• What is crowdfunding?

  Campaign to ask the public for donations
• What is a disadvantage of venture capital?

  Loss of some ownership of the business
• What is an advantage of crowdfunding?

  Potential to raise large amounts quickly
• What is a disadvantage of crowdfunding?

  Investors may want shares or interest
• What is share capital?

  Selling a piece of business for capital
• What is a disadvantage of share capital?

  Loss of decision-making power
• What is trade credit?

  Stock obtained without immediate payment
• What is an advantage of trade credit?

  Improves cash flow for the business
• What is a disadvantage of trade credit?

  Not suitable for large amounts
• What is a grant?

  Funds that do not need to be repaid
• What is an advantage of a grant?

  Doesn't need to be paid back
• What is a disadvantage of a grant?

  Must meet certain criteria to qualify
• What is retained profit?

  Money left after paying expenses
• What is sale of assets?

  Selling company stocks to raise funds
• What factors should be considered when choosing a source of finance?

  Amount needed, cost, and speed