3.1: Sources of Finance

Question 1

The need for finance can be categorized as? (two)

Answer 1

Capital Expenditure and Revenue Expenditure

Question 2

Capital Expenditure

Answer 2

Spending on fixed assets and capital equipment of a business.

Question 3

Examples of Capital Expenditure.

Answer 3

Buildings, equipment, tools and vehicles

Question 4

Revenue Expenditure

Answer 4

Financing daily and routine operations.

Question 5

Examples of Revenue Expenditure

Answer 5

Raw materials, utility bills and paying employees.

Question 6

Internal Sources of Finance (3)

Answer 6

Come from within the business using its own resources; personal funds, retained profit and sale of assets

Question 7

Personal Funds

Answer 7

(Sole traders) use their own personal funds from their savings to fund the start-up

Question 8

Retained Profit

Answer 8

the surplus funds reinvested in the business; belong to the owners (instead of being distributed to shareholds- dividends).

Question 9

Sale of Assets

Answer 9

Selling fixed assets to raise finance

Question 10

External Finance (13)

Answer 10

Comes from outside of the organization

Question 11

Short Term Finance (5)

Answer 11

Up to one year. Solve cash flow problems, pay revenue expenditure. (Expensive). Overdrafts, Trade Credit, Debt Factoring, Leasing, Subsidies.

Question 12

Overdrafts

Answer 12

Financial service, withdraw more money than exists in its bank account. Interest high. Allow business to have emergency access to finance during liquidity problems.

Question 13

Trade Credit

Answer 13

Enables a business to obtain goods from a supplier without having to pay immediately. One-two months.

Question 14

Examples of Trade Credit. (1) Credit Card

Answer 14

Provides interest-free credit if the outstanding balance (amount owed) is paid on time.

Question 15

Examples of Trade Credit. (2) Hire Purchase (medium)

Answer 15

Pay fixed assets (e.g. vehicles) in regular instalments over a predetermined period. The finance company (lender) retains ownership of the FA until the business pays the final instalment.

Question 16

Debt Factoring

Answer 16

Business (bank) that takes over the debtors of a business. The debt factoring service provider charge around 20% of the value of debtors as their fee. (selling of claims over debtors to a debt factor in exchange for immediate liquidity)

Question 17

Leasing (can be medium)

Answer 17

The business only leases a fixed asset and is responsible to maintain it. The leasing contract usually makes the business pay a monthly fee for a fixed period of time.

Question 18

Difference between Leasing and Hire Purchase

Answer 18

HP: ownership of the asset is transferred to the business after its final paid. Leasing: ownership is not transferred at all.

Question 19

Subsidies

Answer 19

Encourages output. Government helps the investment that would be too expensive.

Question 20

Difference between grants and subsidies

Answer 20

Grants: awared for a specific purpose/project and help finance entirely.
Subsidies help partially pay to encourage output. (Same goals)

Question 21

Medium Term Finance

Answer 21

Up to five years. Used to finance capital expenditure or purchase fixed asset. Bank loan or Loan Capital.

Question 22

Long Term Finance (6)

Answer 22

More than five years. Used to fund growth and expansion. (Share Capital, Venture Capital, Loan Capital, Business Angels, Grants, Mortgage, Debentures)

Question 23

Loan Capital

Answer 23

Borrowing funds from a financier (lender; bank). Charges interest, can be paid installments or at the end.