2.1.2 External finance

• Bank loan - an external method of finance from a bank which is paid back over time with interest.
• Business angels - individuals who invest in a business in exchange for a stake in the business.
• Crowdfunding - when a large number of people provide funding for a business in return for a reward.
• External finance - money raised from outside the business.
• Grant - a sum of money given by a government or other organisation which does not need to be repaid.
• Leasing - a contract to acquire the use of resources such as property or equipment.
• Loan - an external source of finance that is repaid with interest over a period of time.
• Overdraft - when a business has a negative bank balance in their bank account because the amount withdrawn is greater than the current balance.
• Peer-to-peer funding - when a person lends money to other businesses or people via online transactions.
• Share capital - the finance raised a business by selling shares.
• Trade credit - when a firm receives materials from a supplier but doesn't have to pay for a given amount of time.
• Venture capital - external source of finance when the business issues shares to a number of investors in return for a capital injection.
• Advantages of bank loan:

  • easy to plan for repayments
• Disadvantages of bank loan:

  • not always available (new firms)
  • interest
  • may require collateral security
• Advantages of business angels:

  • gain business guidance and knowledge
• Disadvantages of business angels:

  • have to give away shares (loss of control)
• Advantages of crowd funding:

  • millions of potential funders
  • useful for risky ideas or when nothing else is available
• Disadvantages of crowd funding:

  • no guaranteed finance
  • idea can be stolen
• Advantages of grants:

  • no need to repay and no interest
  • no loss of control
• Disadvantages of grants:

  • limited availability
  • strict conditions
• Advantages of leasing:

  • reduces the need for finance
  • responsibility for repairing and maintaining asset stays with supplier
  • cheaper upfront cost
• Disadvantages of leasing:

  • can be more expensive long term
  • never own the asset
• Advantages of loans:

  • payable in instalments
  • fixed interest rate gives certainty
  • lower interest rate than overdraft / credit cards
• Disadvantages of loans:

  • may require collateral security
  • variable gives uncertainty
  • high overall interest amount
• Advantages of overdraft:

  • emergency
  • flexible
  • interest only on amount of overdraft used
  • useful for seasonal businesses
  • security not required
• Disadvantages of overdraft:

  • high interest rate charges
  • repayable on demand
  • not always available
• Advantages of peer to peer funding:

  • gives borrowers access to funds at advantageous rates
• Disadvantages of peer to peer funding:

  • finance restricted to small amounts and small businesses
• Advantages of share capital:

  • can raise large amounts of money
  • interest free
  • doesn't have to be repaid
  • investors have limited liability
  • new investors may bring expertise
• Disadvantages of share capital:

  • dividends expected in profitable years
  • shareholders may have differing ideas
  • potential loss of control
• Advantages of trade credit:

  • gives the business time to sell before purchasing
  • helps cashflow
  • no loss of control
  • interest free
• Disadvantages of trade credit:

  • not suitable long term
  • not always available
• Advantages of venture capital:

  • can provide the business with expert advice
  • useful for risky ideas
• Disadvantages of venture capital:

  • often a significant share is demanded by VC
  • high dividends demanded
  • may undermine owners ideas