2.1.2 External Finance

• External Finance

  Investment obtained from; banks, other businesses, peer-to-peer, family and friends, business angel and crowdfunding
• Source of Finance


  Where the finance has come form eg. banks
• Method of Finance


  What the finance is used for or is suitable for
• Family and Friends

  Ltds sell shares to family and friends, sole traders or partnerships will have family who contribute for interest or a share of the profits
• Family and Friends (Benefits and Limitations)


  +: no business plan required, lower interest rates and longer terms, no need for collateral

  -: Tension if the loan is not repaid, may demand money back on a short notice
• Banks


  Lend to start-ups and firms looking to expand, provide overdraft for cash flow problems and have business departments for commercial loans
• Banks (Benefits and Limitations)


  +: Lend to a firm without a % of ownership, the owner retains control

  -: Expensive and interest must be paid on time, new owners will struggle as they have no historical sales, their assets may be used as collateral
• Peer-to-peer

  Lending marketplaces eg. Funding Circle offer lower rates and match businesses with investors who want a good return on investment
• Peer-to-peer (Benefits and Limitations)

  +: Access funding within a week once approved, apply online, returns of 6-7%

  -: Loan comes from several investors, may not raise all the finance needed if people are not interested
• Business Angels

  Lends personal finance for shares for a return over a 3-8 year period
• Business Angels (Benefits and Limitations) 


  +: make quick investment decisions, access to contacts and expertise, mentoring and management, no repayments or interest

  -: investments need to be £10,000-£500,000, give up shares so loss of control
• Crowdfunding


  Donating to receive rewards, lending to receive interest and investment to receive equity
• Crowdfunding (Benefits and Limitations)


  +: Alternative to loans for small firms, no upfront fee, generate funds and promote the business

  -: May need promotional content to attract investors
• Other Businesses

  Large multi-national businesses invest in innovative start-ups
• Loans (Benefits and Limitations)


  +: Owners can plan their repayments as it is a fixed time, simple process, retain ownership

  -: banks charge interest, inflexible and may incur a penalty if the loan is settled early, requires collateral
• Share Capital (Benefits and Limitations)


  +: Extra funding given as the firm grows, no interest, no debt

  -: Need a lot of background info, more shares sold more dividends have to be paid and can be expensive and slow to organise
• Venture Capitalists (Benefits and Limitations)


  +: Raise a large amount of money, gain skills and network of the VC, useful if refused a bank loan

  -: requires a strong business plan and management so is difficult for start-ups, requires 20-30% stake
• Overdrafts (Benefits and Limitations)


  +: quick fix to a bad month, can be arranged via phone, only pay interest on what is overdrawn and once trading improves they can pay it off

  --: spending exceeds the limit is charged heavily, very expensive, not suitable for long time periods
• Leasing (Benefits and Limitations)


  +: lower monthly costs, arranged without advanced fees, the leasing firm maintains the equipment

  -: Is over a fixed term so may be difficult to end contracts
• Trade Credit


  +: Can sell the stock before paying, no interest, build rapport with suppliers for better deals

  -: Not all stock can be purchased and chosen to sit, if they do not repay on time their supplier may refuse trade credit
• Grants (Benefits and Limitations)


  +: Does not have to be repaid, no interest, retain control

  --: Have to find a grant for its industry, lots of competition, may only cover some costs, time consuming application