2.1 Raising Finance

Question 1

What are three sources of internal finance?

Answer 1

Owner’s capital/personal savings
Retained profit
Sale of assets

Question 2

What are six sources of external finance?

Answer 2

Family and friends
Banks
Peer-to-peer funding
Business angels
Crowdfunding
Other business

Question 3

What is a business angel?

Answer 3

An investor who invests in the early stages of a business usually with a significant equity stake.

Question 4

What are some methods of raising external finance?

Answer 4

Share capital
Venture capital
Overdrafts
Leasing
Grants
Trade credit
Loans

Question 5

What are the advantages of retained profit as a source of finance?

Answer 5

No interest
Does not have to be repaid
No dilution of shares

Question 6

What are the disadvantages of retained profit as a source of finance?

Answer 6

Shareholders may have reduced dividends

Question 7

What are the advantages of sale of assets as a source of finance?

Answer 7

No interest
Does not have to be repaid
No dilution of shares

Question 8

What are the disadvantages of sale of assets as a source of finance?

Answer 8

Once sold, gone forever

Question 9

What are the advantages of share capital as a source of finance?

Answer 9

No interest
Does not have to be repaid

Question 10

What are the disadvantages of share capital as a source of finance?

Answer 10

Dilution might upset existing shareholders

Question 11

What are the advantages of loans as a source of finance?

Answer 11

No dilution of shares

Question 12

What are the disadvantages of loans as a source of finance?

Answer 12

Interest payments
Set maturity date

Question 13

What are the advantages of overdraft as a source of finance?

Answer 13

Quick and easy to set up and very flexible
Interest paid only on amount overdrawn

Question 14

What are the disadvantages of overdraft as a source of finance?

Answer 14

Interest payments higher than for a loan

Question 15

What are the advantages of leasing as a source of finance?

Answer 15

Improve cash flows
Regular fixed payments provide certainty

Question 16

What are the disadvantages of leasing as a source of finance?

Answer 16

Expensive
Can be a long-term commitment

Question 17

What are the advantages of trade credit as a source of finance?

Answer 17

Eases cash flow

Question 18

What are the disadvantages of trade credit as a source of finance?

Answer 18

If late paying, can damage credit history

Question 19

What is liability?

Answer 19

The responsibility of the owners of a business for the debt and finance of that business.

Question 20

What type of business has unlimited liability?

Answer 20

Unincorporated businesses
-Sole traders
-Partnerships

Question 21

What type of business has limited liability?

Answer 21

Incorporated businesses
-Private limited
-Public limited

Question 22

What type of finance is available to an unincorporated business?

Answer 22

Owners capital
Loans and overdraft
Trade credit
Leasing

Question 23

What type of finance is available to an incorporated business?

Answer 23

Share capital
Loans and overdrafts
Angel and venture capital
Trade credit
Leasing
Crowdfunding

Question 24

What are four benefits of business plans?

Answer 24

Considers potential problems
Provides sense of direction
Provides clear targets
Can be used to judge success

Question 25

What is a cash-flow forecast?

Answer 25

Shows movement of money into and out of a business over a period of time

Question 26

What figures does a cash-flow forecast show?

Answer 26

Opening balance
Cash inflow
Cash outflow
Monthly balance
Closing balance

Question 27

What are the uses of cash-flow forecasts?

Answer 27

Early identification of problems
Identification of and chasing slow-paying customers
Control of stock
Target setting and motivation for those involved

Question 28

What are some limitations of cash-flow forecasts?

Answer 28

Depends on the accuracy of the figures
May limit flexibility