Finance Sources

Question 1

Give at least two examples of internal sources of finance for businesses.

Answer 1

At least two from:

• Retained profit
• Sale of assets
• Owners capital

Question 2

Why may retained profit be a good source of internal finance?

Answer 2

• As it is a free source of finance that does not incur interest.

Question 3

Why may retained profit be a bad source of internal finance?

Answer 3

• Shareholders may wish to receive their money back in the form of a dividend.

Question 4

Why may sales of assets be a good source of internal finance?

Answer 4

• It frees up monetary value to be used in other areas of the business.

Question 5

Why might sales of assets be a bad source of internal finance?

Answer 5

• It causes the business to loose the benefit of having the assets i.e. no longer owning a delivery vehicle.

Question 6

Is retained profit a long or short term method of internal finance?

Answer 6

• Long term

Question 7

Is sales of assets a short or long term method of internal finance?

Answer 7

• Long term

Question 8

Why might owners capital be a good source of internal finance?

Answer 8

• It is a free source of finance that does not incur interest.

Question 9

Why might owners capital be a bad source of internal finance?

Answer 9

• Owners could loose their personal investment into the business.

Question 10

Is owners capital a long or short term method of internal finance?

Answer 10

• Long term

Question 11

Give at least three examples of external sources of finance for businesses.

Answer 11

At least three from:

• Overdrafts
• Debt factoring
• Bank loan
• Mortgage
• Venture capital
• Share capital
• Crowdfunding

Question 12

What is an overdraft?

Answer 12

Where the bank allows a firm to take out more money than is in its bank account.

Question 13

Is an overdraft a long or short term method of external finance?

Answer 13

• Short term

Question 14

Why might overdrafts be a good source of external finance for businesses?

Answer 14

• It is a flexible way to fund working capital and acts as a buffer for day to day expenses.

Question 15

What might overdrafts be a bad source of external finance for business?

Answer 15

• The bank pay ask for repayment at any time and interest rates are high.

Question 16

What is debt factoring?

Answer 16

Where a firm sells its debt to a third party factor.

Question 17

Is debt factoring a long or short term source of external finance?

Answer 17

• Short term

Question 18

Why might debt factoring be a good source of external finance for a business?

Answer 18

• It allows businesses to receive cash immediately.

Question 19

Why might debt factoring be a bad source of finance for a business?

Answer 19

• Customers could be aware if debts are factored and loose faith in the company.

Question 20

Is a bank loan a long or short term source of finance?

Answer 20

Long term

Question 21

Why may bank loans be a good source of external finance for a business?

Answer 21

• the loan can be negotiated to meet the requirements of the business.
• the loan is paid back over a fixed amount of term
• the bank or loan provider cannot ask for the money repayments before they are due.

Question 22

Why may bank loans be a bad source of external finance for businesses?

Answer 22

• The business has to pay interest on the loan and may have to offer collateral in order to secure it.

Question 23

What is a mortgage?

Answer 23

• A special type of loan which allows for the purchase of property.

Question 24

Why might a mortgage be a good source of external finance for businesses?

Answer 24

Because it is ideal for long term investments.

Question 25

Why might a mortgage be a bad source of external finance for a business?

Answer 25

• Because large amounts of interest can be charged over its lifetime.

Question 26

What is venture capital?

Answer 26

• Capital which is invested at an early stage by an individual or company in return for equity in the business.

Question 27

Is venture capital a long or short term source of external finance?

Answer 27

Long term

Question 28

Why might venture capital be a good external source of finance for businesses?

Answer 28

• It can bring an added level of expertise to the business.

Question 29

Why might venture capital be a bad external source of finance for businesses?

Answer 29

• The business owner may not want input from elsewhere into the running of the business.

Question 30

What is share capital?

Answer 30

An owners investment into a limited company in order to become a shareholder.

Question 31

Is share capital a long or short term source of finance?

Answer 31

Long term

Question 32

Why might share capital be a good source of external finance for businesses?

Answer 32

• It allows the business to have access to very large amounts of capital without having to pay interest.

Question 33

Why might share capital be a bad source of external finance for businesses?

Answer 33

Because it is only available to private limited companies (LTD) and public limited companies (PLC)

Question 34

What is crowdfunding?

Answer 34

Raising money from a large number of people via crowdfunding websites.

Question 35

Is crowdfunding a long or short time source of finance for businesses?

Answer 35

• Long term

Question 36

Why might crowdfunding be a good source of external finance for businesses?

Answer 36

• It is cheap and easy to set up.

Question 37

Why might crowdfunding be a bad source of external finance for businesses?

Answer 37

• It is not suitable for raising large amounts of money.