2.1.2 External finance

• Bank Loan (long term) - rigid agreement with a set payment over a agreed amount of time. Best used during start-up, struggling times or growth.

  • retained profit can be used else where
  • easy to access large sums of money
  • must pay back with interest (flexible interest rates)
  • if not paid back banks can repossess assets
• Ordinary Share Capital/Equities (long term) - each share gives the owner a vote but is risky as there is not a guaranteed dividend. best used during a period of high growth.

  • don't have to repay
  • new shareholders can bring more expertise
  • no longer owns all the business
  • expectation of dividends
• Venture Capital (long term) - A type of investment that is provided to a business in exchange for a share of the business. Best used during a period of high growth.

  • provide large amounts of money (usually more than £1 million)
  • may bring in expert advice
  • give up a share of the business
  • may lose control over decision-making
• Trade Credit (short term)- A business can borrow money from a supplier to pay for goods and services. Best used during struggling times. (30,60,90 days)

  • can help with cash flow
  • miss discounts of paying upfront
  • failure to pay may result in added interest/fees
• Bank Overdraft (short term)- when the bank allows the business to withdraw more from its account than is available/go into the negative to a certain amount. Generally used on a day-to-day basis.

  • easy to arrange and flexible
  • able to borrow as little or much as needed
  • only pay interest on money borrowed
  • banks usually charge high interest rates
  • may have fixed fee for using overdraft
• Lease (short term) - paying to use/borrow another business' assets for a period of time. Best used during start-up or expansion.

  • no large upfront fee to buy the asset
  • asset usually up-to-date and less likely to be faulty so maintenance fees are low
  • more costly long term compared to buying your own equipment
• Government Grants (short term) - a fixed amount of money given by government usually to fund specific projects. Only used if you fit the criteria.

  • doesn't need to be paid back
  • no shares given up
  • application is long, time-consuming process
  • must meet strict criteria