1.3.4 Sources of business finance

Question 1

What is sources of finance?

Answer 1

Where a business can obtain money from

Question 2

What do sources of finance assist with?

Answer 2

Business start up
operating costs
Expansion costs

Question 3

What is short-term sources of finance?

Answer 3

Small amounts of borrowing, which must be repaid within one year

Question 4

What are the different types of short-term finance?

Answer 4

Overdraft facility
Trade credit

Question 5

What is overdraft facility?

Answer 5

When a bank allows a business to withdraw more money than it has in its accounts and pays back later

Question 6

What are the advantages of an overdraft facility?

Answer 6

Quick, Convenient , Flexible:
Interest paid only on the amount of money borrowed and for the amount of time it is borrowed

Question 7

What are the disadvantages of an overdraft facility?

Answer 7

High, variable rates of interest:
A bank may not grant the facility and can remove it at any time

Question 8

What is trade credit?

Answer 8

When a business receives goods from a supplier immediately but agrees to pay them back later

Question 9

What are the advantages of trade credit?

Answer 9

Business receives payment from customers before paying suppliers, removing the need to raise its own finance

Question 10

What are the disadvantages of trade credit?

Answer 10

Not all suppliers offer trade credit:
Suppliers might charge a higher selling price
New businesses may not be offered trade credit until financial trust is gaines

Question 11

What is long-term sources of finance?

Answer 11

Tend to be for larger amounts of money that are needed for longer periods of time

Question 12

What are the different types of long-term finance?

Answer 12

Personal savings
Retained profit
Venture capital
Share capital
Bank loan
Crowdfunding
Sale of assets

Question 13

What are personal savings?

Answer 13

Owner’s own money

Question 14

What are the advantages of personal savings?

Answer 14

Quick and easy to obtain
No interest

Question 15

What are the disadvantages of personal savings?

Answer 15

Might need the money for personal reasons
Might not want to risk losing the money

Question 16

What are retained profits?

Answer 16

Profit made and kept from previous trading years

Question 17

What are the advantages of retained profits?

Answer 17

Quick and easy to obtain
No interest

Question 18

What are the disadvantages of retained profit?

Answer 18

Might need the money for other needs
Might not have any retained profits

Question 19

What is venture capital?

Answer 19

Experienced business people with large capital offer venture capital to invest

Question 20

What are the advantages of venture capital?

Answer 20

Larger capital sums
No need to repay
No interest
Risk carried by venture capitalists
Business advice and experience offered

Question 21

What are the disadvantages of venture capital?

Answer 21

Loss of control of decisions
Profit is shared
May cause conflict with existing shareholders

Question 22

What is share capital?

Answer 22

When a business owner sells shares in the business

Question 23

What are the advantages of share capital?

Answer 23

No need to repay
No interest
Private limited companies can retain as much control as possible buy inviting family and friends to buy shares
Public limited companies can benefit from this quick way to raise significant capital

Question 24

What are the disadvantages of share captial?

Answer 24

Profit is shared
May cause conflict with existing shareholders
Loss of control
Financial information becomes public
For private limited companies, finding investors might be difficult
For public limited companies, greater public scrutiny of business performance
For public limited companies, there is loss of control in the business and financial data becomes public

Question 25

What is a bank loan?

Answer 25

Loan is a sum of money lent by a bank to a business to repay in monthly investments

Question 26

What are the advantages of a bank loan?

Answer 26

Business retains control over business
Does not have to share profits
Fixed loan repayments, so it interest rates increase, loan repayments will remain the same

Question 27

What are the disadvantages of bank loan?

Answer 27

takes time to arrange
Interest is charges
Bank might not grant loan
Inflexible as repayments must be made on time
Collateral is often required

Question 28

What is crowd funding?

Answer 28

An online appeal made to attract multiple investors who wish to put in small amounts each

Question 29

What are the advantages of crowdfunding?

Answer 29

Risk is shared amongst many
No interest
Can reach a wide number of investors
Acts as a method of promotion
A good way of testing a business idea
Does not need to be repaid

Question 30

What are the disadvantages of crowdfunding?

Answer 30

If the overall target funds are not reached, finance is returned to investors
The reputation of the business may suffer if fundraising fails
A business idea may be copied by anyone who sees it on the Internet
Profits are shared

Question 31

What is sale of assets?

Answer 31

When a business sells an item of value

Question 32

What are the advantages of sales of assets?

Answer 32

No interest
Easy and convenient
Creates valuable space

Question 33

What are the disadvantages of sale of assets?

Answer 33

Assets may not realise full market p[rice or not sell at all
Can be seen as a desperate measure
May regret selling assets that are needed in the future