External Finance - IB Business Management Revision Notes

Overview

• External finance is crucial for businesses, especially startups and growing businesses.
• Different types of external finance cater to various business needs.

External Finance for New Business Startups

• Family and Friends:
  • Often a cheap source of funds.
  • Typically comes with no major obligations like offering a share of the business.

External Sources of Finance

• Businesses utilize a variety of external finance sources for different needs.

Types of External Sources

Share Capital

• Raised from selling shares in a limited company.
• Shareholders are entitled to a share of profits and have voting rights at AGMs.

Loans

• Secured Loans:
  • Available to larger businesses.
  • Typically repaid over 5-20 years.
  • Interest rates can vary; non-current assets might need to be sold if repayments are missed.
• Mortgages:
  • Long-term secured loans for purchasing buildings, land, or capital equipment.
  • Interest is payable, and assets are at risk if repayments aren't made.

Overdrafts

• Arrangement with a bank to spend more than what’s in the account.
• Interest is charged only when overdrawn.
• Short-term finance aiding cash flow.

Trade Credit

• Agreement to buy now and pay later (usually 30 to 90 days).
• Usually interest-free; larger businesses can negotiate better terms.

Leasing

• Regular payments made for using machinery or vehicles.
• Assets are not owned, and maintenance costs are not the business's responsibility.

Crowdfunding

• Access finance from many small investors online (e.g., Kickstarter).
• Requires a convincing business plan to attract investors.

Micro-finance Providers

• Small lenders providing finance to those unable to access other sources.
• Useful for riskier businesses; often operate on a crowdfunding basis.

Business Angels

• Individuals investing in startups or expanding businesses.
• Often more risk-tolerant than banks.

Tips and Considerations

• Recent years have made some finance sources harder to access and more expensive.
• Peer-to-peer lending, crowdfunding, and business angels help fill gaps left by banks.
• Recognizing a business's inability to borrow can be a useful evaluative point.

Visual Diagram

• Diagram illustrating the various external sources of finance available to businesses.

Conclusion

• External finance is a crucial resource for businesses to fund growth and manage operations.
• Selection of appropriate finance sources is dependent on business needs and market conditions.

Author: Lisa Eades
Reviewer: Steve Vorster

Details updated on June 17, 2024, by Save My Exams

Exam board: DP