3.5.3

Question 1

what is finance?

Answer 1

the provision of money at the time when its needed by a business

Question 2

what are the 3 main uses of finance?

Answer 2

• initial funds -> to start a business
• working capital -> money required for day to day running of the business
• investment capital

Question 3

what are short term sources of finance?

Answer 3

• required to cover cash shortages and payment of bills -> repaid within 1 year

Question 4

what are examples of short term finance?

Answer 4

• retained profit
• debt factoring
• bank overdraft
• trade credit

Question 5

what are long term sources of finance?

Answer 5

• used to help fund capital investment e.g. new machinery - > repaid in 3 years +, monthly interest is lower

Question 6

what are examples of long term finance?

Answer 6

• share capital
• bank loans
• venture capital
• retained profit

Question 7

what is the main source of finance for a new business?

Answer 7

• owners’ own funds e.g. redundancy and own savings
• family and friends investment

Question 8

what does a business need to consider when making financial decisions?

Answer 8

• how much finance is needed?
• how long is the finance needed for?
• how much will the repayments cost?
• what is the finance needed for?
• is the business owner willing to lose some control in return for the finance?
• does the business have anything to offer as security?

Question 9

what is internal sources of finance?

Answer 9

money generated from inside the business

Question 10

what are internal sources of finance?

Answer 10

• retained profit
• working capital
• sales of assets

Question 11

what is retained profit?

Answer 11

money kept back within the business instead of being paid out to owners

Question 12

what are the benefits of retained profit?

Answer 12

• cheap -> no interest charges
• provides funds for future growth
• offers a buffer against liquidity problems
• no loss of ownership or control

Question 13

what are the drawbacks of retained profit?

Answer 13

• only available to established firms
• opportunity cost
• shareholders may prefer dividends
• inefficient use of resources

Question 14

what is working capital?

Answer 14

• the money a business needs to be able to operate from day to day
• measures a business’ liquidity, operational efficiency and short term financial health
• the difference between a firms current assets and short term liabilities

Question 15

what is the sale of assets?

Answer 15

selling of assets that no longer are considered useful to a business
- helps improve cash flow

Question 16

what are the pros of sale of assets?

Answer 16

• cheap -> no interest charges
• provides immediate one-off boost to cash flow

Question 17

what are the cons of sale of assets?

Answer 17

• only available to established firms
• businesses may need assets again in the future

Question 18

what is external sources of finance?

Answer 18

generated outside of the business

Question 19

what are the benefits to external sources of finance?

Answer 19

• extra cash into business

Question 20

what are the drawbacks of external sources of finance?

Answer 20

• owners loose an element of control
• will have to repay debt back with interest

Question 21

what are external sources of finance?

Answer 21

• overdrafts
• bank loans
• crowdfunding
• debt factoring
• venture capital
• share capital

Question 22

what is an overdraft?

Answer 22

allow a business to spend more money that is actually in their current account
- provides a source of working capital

Question 23

pros of an overdraft?

Answer 23

• improves working capital
• helps cover cash flow deficits to allow a firm to keep trading

Question 24

what are the cons of an overdraft?

Answer 24

• interest charged daily
• banks can withdraw

Question 25

what is a bank loan?

Answer 25

- a sum of money given by the bank - banks look for security against a loan - if repayment for the loan is not met, security is used instead

Question 26

what is debt factoring?

Answer 26

- a cheaper alternative to overdrafts - provides an immediate source of finance, helps to improve working capital and cash flow

Question 27

what is venture capital?

Answer 27

professional investors who identify SME's that offer potential for profit

Question 28

what are the pros of venture capital?

Answer 28

- large amount of capital invested - access to skills, experience and resources of venture capitalist -> more rapid growth

Question 29

what are the cons of venture capital?

Answer 29

- loss of control - venture capitalist will demand shares and a seat on the board

Question 30

what is share capital?

Answer 30

money raised when a business becomes a private limited company by offering shares to a select group of people in return for capital - long term - permanent and doesn't have to be repaid

Question 31

what is crowdfunding?

Answer 31

funding a project by raising money from a large number of people - typically via the internet