5.2 Sources of Finance

Question 1

What is the need for finance when establishing a new business?

Answer 1

To buy items before it can produce or sell anything, like a factory, office, or shop, as well as furniture and machinery.

Question 2

Why do businesses need finance for funding expansion?

Answer 2

To pay for a larger factory, shop, or office, along with furniture, machinery, and more materials or stocks.

Question 3

What financial needs arise from recruitment in a business?

Answer 3

Costs for advertising jobs, selecting workers, and paying wages and salaries of new staff.

Question 4

What types of costs are associated with marketing for a business?

Answer 4

Costs for advertising and public relations.

Question 5

What are the day-to-day financial needs of a business?

Answer 5

Buying materials, paying expenses such as heating, and paying wages.

Question 6

Fill in the blank: When a business starts up, it will need to buy items before it can _______.

Answer 6

[produce or sell anything]

Question 7

True or False: A business does not need finance for marketing campaigns.

Answer 7

False

Question 8

What are some examples of items a new business might need to purchase?

Answer 8

• Factory
• Office
• Shop
• Furniture
• Machinery

Question 9

What is owners’ capital?

Answer 9

Money from savings put into the business by the owner(s)

This refers to the initial investment made by the business owner to fund operations.

Question 10

Define retained profit.

Answer 10

Profit that is not distributed to shareholders as dividends

Retained profit is often reinvested in the business for growth.

Question 11

What does the sale of assets refer to?

Answer 11

Items sold by the business

Selling assets can be a way for a business to raise funds.

Question 12

What is an overdraft?

Answer 12

An arrangement with a bank that a business can spend more money than it has in its account

This is a short-term financing option for businesses.

Question 13

Define trade credit.

Answer 13

When the business buys goods to sell and does not need to pay the supplier for a period of time - often 30 days

This allows businesses to manage cash flow more effectively.

Question 14

What does taking on a partner involve?

Answer 14

Adding a new partner who contributes some new capital

This can help to increase the financial resources of the business.

Question 15

What is a loan?

Answer 15

A sum of money borrowed for a stated period at an agreed rate of interest

Loans are often used for specific investments or to cover operating costs.

Question 16

Fill in the blank: Owners’ capital is money from _______.

Answer 16

[savings]

This reflects the financial commitment of the business owner.

Question 17

True or False: Retained profit is distributed to shareholders as dividends.

Answer 17

False

Retained profit is kept within the company rather than paid out.

Question 18

Fill in the blank: An overdraft allows a business to spend more money than it has in its _______.

Answer 18

[account]

This can provide necessary funds for short-term needs.

Question 19

True or False: Trade credit requires immediate payment upon receiving goods.

Answer 19

False

Trade credit allows businesses a grace period before payment is due.

Question 20

What is the definition of ‘Source of Finance’?

Answer 20

The means by which a business obtains funds to support its operations or investments.

Question 21

What are the two main categories of sources of finance?

Answer 21

Internal and External.

Question 22

What are examples of Internal sources of finance?

Answer 22

• Owners Capital
• Retained Profit
• Sale of Assets

Question 23

What is an example of an External source of finance?

Answer 23

Overdraft.

Question 24

For what purposes is an overdraft typically used?

Answer 24

• Covering short-term cash flow issues
• Supporting working capital needs

Question 25

What types of businesses can utilize internal sources of finance?

Answer 25

* New businesses * Established businesses

Question 26

What is the typical duration for sources of finance?

Answer 26

* Short term * Medium term * Long term

Question 27

What is an advantage of using Owners Capital?

Answer 27

No need to repay the money.

Question 28

What is a disadvantage of using Retained Profit?

Answer 28

May not be sufficient for large investments.

Question 29

Fill in the blank: Owners Capital allows for _______ without incurring debt.

Answer 29

financing

Question 30

True or False: Retained profit can be used to fund new projects.

Answer 30

True.

Question 31

What is a potential disadvantage of selling assets as a source of finance?

Answer 31

May not be possible to find a buyer.

Question 32

What is a key advantage of using an overdraft?

Answer 32

Allows for flexibility in managing short-term financial needs.

Question 33

What is a disadvantage of external finance sources?

Answer 33

Interest rates may be high.

Question 34

What is the definition of Trade Credit?

Answer 34

A method of financing where a buyer can purchase goods or services and pay for them later.

Question 35

What are the two types of loans?

Answer 35

Internal and External.

Question 36

What is an example of an External financing method?

Answer 36

Share Issue.

Question 37

What is Crowdfunding?

Answer 37

A method of raising capital through the collective effort of friends, family, and individual investors.

Question 38

What types of businesses can access Trade Credit?

Answer 38

All types of businesses.

Question 39

What are the three terms for loans?

Answer 39

* Short term * Medium term * Long term

Question 40

What is an advantage of Trade Credit?

Answer 40

No cost to raise a partner.

Question 41

What is a disadvantage of Trade Credit?

Answer 41

Interest is charged if the credit is not repaid within the time limit.

Question 42

Fill in the blank: Trade Credit is typically used for _______.

Answer 42

[new and/or established businesses]

Question 43

True or False: Trade Credit requires repayment with interest.

Answer 43

False.

Question 44

What must be monitored for Trade Credit to be effective?

Answer 44

The period of credit.

Question 45

What can happen if repayments are not made on time in Trade Credit?

Answer 45

Credit may need to be repaid quickly.

Question 46

What is a share issue?

Answer 46

Money raised from investors by selling new shares. ## Footnote This process allows a company to generate capital by offering ownership stakes to investors.

Question 47

What is crowdfunding?

Answer 47

Money raised through an appeal to the public who are supporters of the business. ## Footnote Crowdfunding typically involves small contributions from a large number of people, often facilitated through online platforms.

Question 48

Fill in the blank: Money raised from investors by selling _______.

Answer 48

[new shares]

Question 49

True or False: Crowdfunding is only for large investors.

Answer 49

False ## Footnote Crowdfunding is designed to gather small amounts from many individuals, not just large investors.

Question 50

What are the two sources of finance mentioned?

Answer 50

* Share issue * Crowdfunding ## Footnote These sources represent different methods for businesses to raise capital.

Question 51

What is internal finance?

Answer 51

Finance raised from within the business ## Footnote Main sources include owners' capital, retained profit, and sale of assets.

Question 52

What are the main sources of internal finance?

Answer 52

* Owners' capital * Retained profit * Sale of assets ## Footnote These are funds generated from within the business itself.

Question 53

What is external finance?

Answer 53

Finance raised from sources outside the business ## Footnote This includes funds obtained from external entities or individuals.

Question 54

What are the main sources of external finance?

Answer 54

* Overdraft * Trade credit * Loan * Crowd funding * Share issues ## Footnote These sources provide funding from outside the organization.