6 - Sources of finance

Question 1

What is meant by short term finance

Answer 1

Up to 3 years

Question 2

What is meant by medium term finance

Answer 2

3-10 years

Question 3

What is meant by long term finance

Answer 3

10+ years

Question 4

What are some sources of finance

Answer 4

Divestment
Sale of fixed assets
Retained profits
Factoring
Sale/lease back
Personal savings

Question 5

What is divestment

Answer 5

Stopping investment into an area of the business

Question 6

Advantages of divestment

Answer 6

Focus on fewer areas

Specialisation

Question 7

Disadvantages of divestment

Answer 7

Less diversification

Redundancies

Question 8

What is sale of fixed assets

Answer 8

Selling capital assets to obtain finance

Question 9

Advantage of sale of fixed assets

Answer 9

Large source

Question 10

Disadvantages of selling fixed assets

Answer 10

Time consuming

Costs

Question 11

What is retained profit

Answer 11

Investing profits from previous years back in to the firm

Question 12

Advantages of retained profit

Answer 12

Easy to obtain

No cost

Question 13

Disadvantages of retained profit

Answer 13

Can’t pay high dividends

Opportunity costs

Question 14

What is factoring

Answer 14

Selling debts to debt collectors

Question 15

Advantages of factoring

Answer 15

Quick

Get rid of long term issues

Question 16

Disadvantages of factoring

Answer 16

Expensive

Question 17

What is sale and leaseback

Answer 17

Selling your own property then leasing it back

Question 18

Advantages of sale and leaseback

Answer 18

No longer responsible for upkeep

High finance

Question 19

Disadvantages of sale and leaseback

Answer 19

Long term costs in rent
No longer own asset
Subject to their t’s and c’s

Question 20

What is personal savings

Answer 20

Where the owner invests their own money into the firm

Question 21

Advantages of personal saving investment

Answer 21

Easily obtainable

Cheap

Question 22

Disadvantages of personal savings investment

Answer 22

Likely opportunity cost to owner

High personal risk for owner

Question 23

What are some examples of external sources of finance

Answer 23

Overdraft
Trade credit
Leasing
Hire purchase
Bank loan
Grant
Share issue
Mortgage
Venture capital 
Debenture

Question 24

What is an overdraft

Answer 24

What the bank let you spend more than what is in your account

Question 25

Advantages of an overdraft

Answer 25

- cheap | - easily obtainable

Question 26

Disadvantages of overdraft

Answer 26

Expensive and not suitable if long term | Business may overspend

Question 27

What is trade credit

Answer 27

Suppliers allow you to buy goods now but pay later for goods

Question 28

Advantages of trade credit

Answer 28

Improves cash flow | Builds trust and respect

Question 29

Disadvantages of trade credit

Answer 29

Lose supplier if not honoured | Less likely EOS

Question 30

What is leasing

Answer 30

A legal agreement where you pay monthly for the use of something

Question 31

Advantages of leasing

Answer 31

Not responsible for upkeep | No high initial cost

Question 32

Disadvantages of leasing

Answer 32

Don’t own asset so restricted | Poor upkeep

Question 33

What is hirepurchase

Answer 33

Paying for something in monthly instalments after a deposit

Question 34

Advantages of hire purchase

Answer 34

Good for cash flow

Question 35

Disadvantages of hire purchase

Answer 35

Don’t own it until paid off | Long term

Question 36

What is a bank loan

Answer 36

When a bank lends you money, that over a fixed period has to be paid back with a rate of interest

Question 37

Advantages of bank loan

Answer 37

Large amount | Improve credit score

Question 38

Disadvantages of bank loan

Answer 38

Interest costs | Poor credit score if not paid back

Question 39

What is a grant

Answer 39

Sum of money given by government for specific purposes

Question 40

Advantages of grant

Answer 40

No costs | Large amount, helps startups

Question 41

Disadvantages of grants

Answer 41

Specific reason | Restrictions

Question 42

What is share issue

Answer 42

A firm offers for sale new shares

Question 43

Advantages of share issue

Answer 43

Obtain large amount Good publicity Easy on stock exchange

Question 44

Disadvantages of share issue

Answer 44

Difficult and costly process | Increase pressure

Question 45

What is a mortgage

Answer 45

Bank or building society lends money at interest for purchase of a property

Question 46

Advantages of mortgage

Answer 46

Pay in instalments | Improve credit score

Question 47

Disadvantages of mortgage

Answer 47

Possibility of bankruptcy | Pay interest

Question 48

What is venture capital

Answer 48

Another firm invests into your business

Question 49

Advantages of venture capital

Answer 49

Large amount | Gain expertise

Question 50

Disadvantages of venture capital

Answer 50

Loss of control | Pressure

Question 51

What is a debenture

Answer 51

Borrowing money/loan from the public at a fixed rate of interest

Question 52

Factors considered when deciding on finance

Answer 52

``` Amount required Reasons for it Time scale Type of business Security State of economy ```