External

Sources
of
finance

Describe what it is

Advantages

Disadvantages

Owners
Capital

Money invested into the

business from the owners
personal savings. More
likely to be on a small
business.

-Zero interest as it is
their money.

- It is a limited
amount.
-If It is a partnership,
one could pay more
than the other which
could cause conflict.
-Takes a lot of
commitment to the
company.

Loans

A loan is a sum of money that is

borrowed by an individual or a
business and is expected to be
paid back over a specific period
of time, often with added
interest.

-unlike an overdraft, a
loan is not repayable on
demand unless you
breach any of the loan
terms so you are
guaranteed the money
for the whole term of
the loan

-you may have to pay

charges if you want
to repay your loan
early

-loans can be tied to

the lifetime of
equipment or other
assets that you are
borrowing the money to
pay for
-if interest rates are
fixed, you will know the
level of repayments you
will need to make for
the entire term of the
loan
-you won't have to give
the lender a percentage
of your profits or a
share in your business

Crowd
funding

Crowdfunding is the use of small

amounts of capital from a large
number of individuals to finance a new
business venture. Crowdfunding makes
use of the easy accessibility of vast
networks of people through social
media and crowdfunding websites to
bring investors and entrepreneurs
together.

-successful projects can

get a lot of attention on
social media which can
often do more for the
business than the
money does.
-A valuable form of
marketing
-Almost instant access
to funds if successful.

-you may be unable

to meet monthly
payments if your
customers don't pay
you on time
-you could lose
personal property or
assets (such as your
home) if your loan is
secured against
them, and you don't
meet your
repayments
-if interest rates are
variable, the cost of
your monthly
payments may
change during the
period of the loan

-Risks of other
companies copying
the idea.
-If the target amount
isnt reached, the
investors get their
money back and the
business goes away
empty handed
-If you fail, your
reputation can be

-No interest

ruined.
-Loss of ownership of
the business

Mortgage
s

a legal agreement by which a bank,

building society, etc. lends money at
interest in exchange for taking title of
the debtor's property, with the
condition that the conveyance of title
becomes void upon the payment of
the debt.

-Most cost effective way

of borrowing
-The interest on
mortgages are often a
lot lower than any other
way of borrowing
money
-You can borrow large
amounts of money.

-You pay back a lot

more than you
borrowed
-Large Debt
-There may be
various fees such as
valuation fees and
conveyancing costs.

Venture
Capital

Venture capital is financing that

investors provide to startup companies
and small businesses that are believed
to have long-term growth potential.

-Business
expertise. Aside from
the financial backing,
obtaining venture
capital financing can
provide a start up or
young business with a
valuable source of
guidance and
consultation.
-They can offer valuable
connections
-Offer valuable
resources

Debt
Factoring

Debt factoring is a financial

arrangement by which a business sells
its invoices to a third party at a
discount. Businesses use debt
factoring to improve their cashflow.

-Quick infusion of
cash=After the initial
set-up, you can usually
get cash in your bank
account within 24 to 48
hours after submitting
invoices for factoring.
-Improve cash flow
-Shorten the cash
cycle=The time
between the purchase
of goods and the actual
receipt of payment for
the sale of them can be
significant. With the
help of factoring, that
cash cycle can be
significantly shortened.
This makes it possible
to buy more goods and
sell them for additional
profit.
-Lower overhead costs
-Protection against bad
debts

-Loss of control
-Minority ownership
status
-Forced Management
changes
-High risk because
the business can go
bust and you can
therefore lose a lot of
money.
-Could cause conflict
between the investor
and owner because
of disagreements
over ideas and the
companies future.
-The interest rate is
higher than bank
financing
-Potential bad debt
liability
- May find that you
have an additional
charge

Hire
Purchase

A hire purchase is a method of buying

goods through making instalment

Leasing

-A lease is a contract outlining the terms

-Doesnt cost you

under which one party agrees to rent

money to attain.
-There is a balanced
cash outflow as the
leaser is able to make
the payments over a
period of months or
even years. It is
therefore an efficient
way of borrowing
assets.
-It is a better use of
capital. Instead of
paying a large amount
to purchase the asset
that you may only need
for a short period of
time, you are able to
lease it at a lower cost
and for your desirable
period of time.

payments over a period of time.

property owned by another party. It

guarantees the lessee, the tenant, use of an
asset and guarantees the lessor, the
property owner or landlord, regular
payments from the lessee for a specified
number of months or years. Both the lessee
and the lessor face consequences if they fail
to uphold the terms of the contract

Trade
credit

A trade credit is an agreement where a

customer can purchase goods on
account (without paying cash), paying
the supplier at a later date. Usually
when the goods are delivered, a trade
credit is given for a specific number of
days 30, 60 or 90. Trade credit is
essentially a credit a company gives to
another for the purchase of goods and
services.

-Convenient because
you can pay it in
instalments
-Increases sales
because more people
can afford it

-Higher rate of
interest is charged,
therefore the total
price for the car will
have increased
-High risk, people
may default on
payment. You will
then have to
repossess the item
which will then be
hard for the company
to resell
-You may have to
enter into a lease
agreement which
may be expensive as
it ties you into a
certain period of time
-Lease
Expenses:
Lease payments are
treated as expenses
rather than as equity
payments towards an
asset.
-No Ownership: At
the end of leasing
period the lessee
doesnt
end
up
becoming the owner
of the asset though
quite a good sum of
payment is being
done over the years
towards the asset.

-From the perspective

-The potential risk to

of the creditor, or
supplier, trade credit
should induce more
sales over time by
allowing customers to
make purchases
without immediate
cash. This flexibility in
purchasing methods
also encourages
customers to make
larger purchases when
prices are right than
they might if they had
to pay cash upfront.
Along with higher sales
volume, trade credit
often produces interest
fees and late payment
fees for creditors, which

the supplier when

offering trade credit
is bad debt. If buyers
do not pay off their
debt, and in a timely
manner, it has
negative cash effects
on the supplier.
Companies
eventually have to
write off unpaid
accounts as bad
debt, which lowers
their profits.
Accounts that remain
unpaid for a long
period of time still
have negative
effects, though. This
means the supplier

increases revenue.

Grants

-You do not have to pay

A grant is an amount of money given
to an individual or business for a
specific project or purpose. You can
apply for a grant from the government,
the European Union, local councils and
charities.

Donation
s

Peer to
peer
lending

Invoice
discounti
ng

grants back or pay

interest on it
-As you are not loaning
money or having other
companies invest in
your business, you will
not lose any control
over your business and
therefore will not have
to change management
or other ideas.

has to wait to collect

cash which it needs
to pay its own bills.
-If buyers are not
careful in the way
that they use trade
credit, they can end
up paying much
higher costs for
inventory.
-Finding a grant that
suits your specific
project can be very
difficult.
-There is a lot of
competition for
grants so finding one
can be difficult.