External Finance PDF

[External Finance] [\ Friends and family] [Ad] 1. It is a cheaper method of finance if the interest rates are lower. 2. Do not need to make repayments if the amount is gifted. 3. Do not need to share a stake in the business. [Dis] 1. There would be a loss of friendship or breakdown of fam...

[External Finance] [\ Friends and family] [Ad] 1. It is a cheaper method of finance if the interest rates are lower. 2. Do not need to make repayments if the amount is gifted. 3. Do not need to share a stake in the business. [Dis] 1. There would be a loss of friendship or breakdown of family relationships if repayment is not made. [Peer-to-peer lending] This is lending money to individuals or peers to avoid the use of the bank. - Peer-to-peer funding sites charge 1% of the commission. - The lender can choose which burrower to lend. - Loans are unsecured. - Takes place online. [Dis] 1. Lack of protection from the government [Business angels] Individuals who may invest between 1000 to 100000+ often for an exchange of a stake in the business. The problem is that angels normally take a stake in the business, the angels and the current business owner must have shared interests and a common vision for the future direction of the business. [Crowdfunding] A fundraising method is where individuals or businesses raise small amounts of money from a large group of people via online platforms. Crowdfunding is often used for creative projects, startups, charitable causes, or personal needs. [\ Methods of finance] [Loan] [Bank loan] - Unsecured loan - Quicker to obtain -- banks do not justify the value of assets. - High interest as they have high-risk - No need for collateral - Based on the borrower's creditworthiness, financial history, income, and others. [Mortgages] - Secured loan - Lower interest rates -- Lender has low-risk - Need of collateral for the safety of the loan. [Share Capital] [Ordinary shares] - No guaranteed dividends - Have voting rights [Preference shares] - Fixed dividends - No voting rights [Differed shares] - The founders of the company hold these and may receive a dividend after ordinary shares have been paid a minimum amount. [Venture Capital] - Take an active role in the company - Invest after the initial stage of investment and prefer technology [Ads] - Access to capital - Expertise and mentoring -- provide guidance and advice as they have industrial knowledge. - Faster Scaling -- allow them to recruit talent, increase product development, and expand quickly. [Dis] - Complex agreements - restrict future fundraising or decision-making - Loss of control - less control over decision-making - Pressure for high growth - aggressive strategies that might not align with the startup\'s long-term vision. [Lease] [Ad] 1. The users do not bear maintenance and repair costs. 2. No large sums are needed to buy or use the equipment. 3. A lease is easy for new businesses to acquire. 4. Leasing companies have highly up-to-date equipment and machinery [Dis] 1. Expensive than buying the equipment 2. The leased equipment cannot be set as collateral for the loan as the security. [Grants] - No need for repayments - A formal agreement - It has a specific time at which the provided fund can be used on the specific project. [Pros] 1. Businesses can receive generous amounts of money. 2. It is cheaper due to no interest rates or repayments needed. 3. Minimized risk -- no need for collateral [Cons] 1. The possibility of receiving future grants may be lost if the business fails to complete the project. 2. Need to do time-consuming research on the granting agency before writing the grant which can incur some costs to the business. [Choose appropriate finance] - Whether short-term or long-term - Financial position of the business (when giving collateral) - Legal status of the business (limited or unlimited) - Cost