2.1.2 External Finance

Short term

🔗 When a business withdraws more cash from the bank than they own

Safe, low-risk approach, not a form of equity, no shares given up, keeps full control of business, maintains all decision-making power, more motivated, more commitment
As it is a form of short-term debt, not involved in the gearing ratio
There is a financial cost, a form of debt, interest must be paid, higher costs
Seen as riskier to banks as repayments aren't agreed upon 📝 (like a loan for example), charged a higher interest rate to mitigate the level of risk
Unreliable as the bank can ask for money back at any time 📝 (only likely to happen if the business has had persistent financial problems)

🔗 Suppliers give business supplies and agree to let them pay later

Safe, low-risk approach, not a form of equity, no shares given up, keeps full control of business, maintains all decision-making power, more motivated, more commitment
As it is a form of short-term debt, not involved in the gearing ratio
Helps business meet a demand spike, immediate replenishment in resources, higher customer satisfaction, higher market share
Can build trust and a relationship between business and supplier
Risk of relationship with supplier deteriorating if credit terms are not met, abuse relationship, supplier no longer supplies to you, long-term consequences, may not have another supplier.
Late payments could affect the PR of the business, tarnish reputation.

🔗 Allows a business to borrow a sum of money and pay it back with interest over an agreed period of time

Safe, low-risk approach, not a form of equity, no shares given up, keeps full control of business, maintains all decision-making power, more motivated, more commitment
Can get a fixed interest loan with the ability to decide repayment terms, easier to plan for repayments, facilitate budgeting
Always making repayments can improve credit score, allow for borrowing with a lower interest rate in the future, facilitate getting further sources of finance in the future
There is a financial cost, a form of debt, interest must be paid, higher costs
Potential to lose assets if they don't make repayments (good to have limited liability), can also lower credit score, could limit sources of finance
Lacks flexibility, must keep to repayment terms

🔗 Financial award given by the government to an eligible grantee

Safe, low-risk approach, not a form of equity, no shares given up, keeps full control of business, maintains all decision-making power, more motivated, more commitment
No financial cost, not a form of debt, no interest or repayments must be paid, benefit from lower costs
Free promotion/exposure for business
Competitive application process, difficult to achieve grant
There is an opportunity cost if rejected, time-consuming process, time spent on applications could have been spent on other aspects of the business

🔗 A business pays to use something for a particular period of time

🔗 After all payments have been made, the business owns the equipment

Helps a business to forecast cash flow as they can compare the payments with their expected revenues and profits
A lease is seen as a debt, so it may make securing loans in the future more difficult

🔗 Money invested by shareholders in exchange for equity

No financial cost, not a form of debt, no interest must be paid, benefit from lower costs
Benefit from added expertise, shareholders' perspectives could be useful, allowing for more lucrative decisions to be made
Form of equity, no repayments have to be made
Form of equity, shares are given up, don't keep full control of the business, lose some decision-making power, increased risk of a takeover, less motivated, less commitment
Dividends will be paid to appease shareholders, retained profits will be reduced, potential stakeholder conflict

🔗 Raising finance from a large number of people e.g., GoFundMe pages

No financial cost, not a form of debt, no interest must be paid, benefit from lower costs
Potential to reach a large wider audience, excellent exposure for business, good promotion, helps to build brand image immediately
May lose your reputation if your business fails
Won't benefit from added expertise

🔗 Capital invested where there is a high level of risk in exchange for equity (start-up businesses)

🔗 Individuals who invest their personal wealth to provide capital in exchange for equity (start-up businesses)

Benefit from added expertise, investors' perspectives could be useful, allowing for more lucrative decisions to be made
Risk is shared
Form of equity, no repayments have to be made
Form of equity, shares are given up, don't keep full control of the business, lose some decision-making power, increased risk of a takeover, less motivated, less commitment
Profits must be shared