5 - Sources Of Finance

Question 1

What Are Examples Of Sources Of Finance?
(7 Points)

Answer 1

~ Debt factoring.

~ Overdrafts.

~ Retained profit.

~ Share capital.

~ Loans.

~ Venture capital.

~ Crown funding.

Question 2

What Is Debt Factoring?
(3 Points)

Answer 2

~ Process of selling the debts owed to a business to a financial institution.

~ After the business will receive further payment, but the financial institution will keep a percentage of the repayment as a fee.

~ An external, short term source of finance.

Question 3

What Are The Benefits Of Debt Factoring?
(3 Points)

Answer 3

~ Large amount, quickly.

~ Improves short term cash flow.

~ Reduces the risk of bad debts and credit risk.

Question 4

What Are The Drawbacks Of Debt Factoring?
(2 Points)

Answer 4

~ Reduces profitability, as financial institution keeps a fee.

~ Impact on customer relationships, due to a more aggressive approach in collecting payments from banks.

Question 5

What Is An Overdraft?
(3 Points)

Answer 5

~ Business withdraws more cash from a bank account than it holds, bank account becomes negative.

~ Interest is charged on the overdrawn amount.

~ Short-term and external source of finance.

Question 6

What Are The Benefits Of Overdrafts?
(4 Points)

Answer 6

~ Quick and simple to organise.

~ Immediate availability.

~ Only pay interest on the amount used.

~ No control of the business is given up.

Question 7

What Are The Drawbacks Of Overdrafts?
(3 Points)

Answer 7

~ High interest rates.

~ Bank can cancel at any time.

~ Persistent use, will decrease credit rating.

Question 8

What Is Retained Profit?
(2 Points)

Answer 8

~ Using historical profit, from previous years to invest.

~ Internal, long term source of finance.

Question 9

What Are The Benefits Of Retained Profit?
(3 Points)

Answer 9

~ Avoids interest repayments.

~ Available Immediately.

~ No control or share given up.

Question 10

What Are The Drawbacks Of Retained Profit?
(3 Points)

Answer 10

~ Conflicts with share holders.

~ Opportunity cost.

~ May be finite number of retained profits.

Question 11

What Is Share Capital?
(2 Points)

Answer 11

~ The money that a company raises by issuing shares to investors.

~ External, long term source of finance.

Question 12

What Are The Benefits Of Share Capital?
(3 Points)

Answer 12

~ No obligation to repay and no interest repayments.

~ Attracts investment, due to the issuing of shares on the stock exchange.

~ Funds can be used flexibly.

Question 13

What Are The Drawbacks Of Share Capital?
(4 Points)

Answer 13

~ Risk of hostile takeovers.

~ Dividend obligation.

~ Complex and costly process of issuing shares.

~ Given up some control.

Question 14

What Are Loans?
(2 Points)

Answer 14

~ When a business borrows a sum of money, and pays it back with interest.

~ External, long term source of finance.

Question 15

What Are The Benefits Of Loans?
(3 Points)

Answer 15

~ Retains ownership and control of the business.

~ Frequent repayments may improve credit score.

~ Large sums of money quickly.

Question 16

What Are The Drawbacks Of Loans?
(4 Points)

Answer 16

~ Interest must be paid regardless of financial performance.

~ Collateral requirements, if there is failure to pay.

~ Opportunity cost.

~ Increases gearing of a business.

Question 17

What Is Venture Capital?
(3 Points)

Answer 17

~ Offered by a venture capitalist fund to high risk, high reward firms, in exchange for a share of the business.

~ Venture capitalists normally look for a high rate of return in a specific time period.

~ External, long term source of finance.

Question 18

What Are The Benefits Of Venture Capital?
(4 Points)

Answer 18

~ Potential large sums of money for investment.

~ Venture capitalists often provide valuable advice and guidance.

~ Improves network and connections.

~ Provides potential for rapid growth.

Question 19

What Are The Drawbacks Of Venture Capital?
(4 Points)

Answer 19

~ Partial loss of ownership and control.

~ Rapid growth can lead to DEOS.

~ High costs, due to the equity stake that investors demand.

~ Potential for conflict.

Question 20

What Is Crowdfunding?
(2 Points)

Answer 20

~ Raising finance from a large number of people each investing different amounts of money, often small amounts.

~ External and short term source of finance.

Question 21

What Are The Benefits Of Crowd Funding?
(3 Points)

Answer 21

~ Increased visibility, providing free publicity.

~ No need for collateral.

~ Provides engagement with investors.

Question 22

What Are The Drawbacks Of Crowd Funding?
(4 Points)

Answer 22

~ Less control and ownership, due to investors receiving equity.

~ Reputation risk, if there is failure to meet expectations.

~ Highly competitive.

~ Time consuming.