SOURCES OF FINANCE

Question 1

Why is finance needed?

Answer 1

• starting up - money need for establishment an day-to-day

- growing

Question 2

advantages of retained profit

Answer 2

• no liabilities
• sustainable
• can provide large sums

Question 3

disadvantages of retained profit

Answer 3

• may not be large enough when starting up

Question 4

advantages of sale of assets

Answer 4

• can provide large one time payment

- makes use of unused items e.g. machinery

Question 5

disadvantages of sale of assets

Answer 5

• may be necessary for business
• not sustainable
• not very liquid therefore can take a while to sell

Question 6

advantages of improved management of working capital

Answer 6

• easy to do
• no liabilities
• more efficient in long term

Question 7

disadvantages of improved management of working capital

Answer 7

• may not free up large amounts

Question 8

advantages of family and friends

Answer 8

• low interest levels

- no credit score needed

Question 9

disadvantages of family and friends

Answer 9

• can be detrimental to family relationships

- low amounts of money

Question 10

advantages of banks

Answer 10

• offer large sums

Question 11

disadvantages of banks

Answer 11

• collateral involved
• inaccessible for start-ups
• high interest

Question 12

advantages of peer-to-peer funding

Answer 12

• lower interest than loans
• cut out bank middle-man to get a better deal
• more accessible

Question 13

disadvantages of of peer-to-peer funding

Answer 13

• mostly seem to work for attractive businesses
• high-credit risks
• government provides no protection to lenders (no insurance)

Question 14

advantages of business angels

Answer 14

• offer large sums for start-ups

- can offer advise and contacts

Question 15

advantages of business angels

Answer 15

• giving up large proportion of equity

- loss of control

Question 16

advantages of crowdfunding

Answer 16

• no liability
• fast
• form of marketing and media attention
• test customers reaction to the product
• feedback on product

Question 17

disadvantages of crowdfunding

Answer 17

• product needs to be appealing
• if you don’t reach your target, the money will likely come go back to the investors
• someone may steal idea from crowdfunding site if not copyrighted

Question 18

advantages of loans

Answer 18

• keep control of business
• large sums
• money guaranteed for certain period
• predictable monthly payments

Question 19

disadvantages of loans

Answer 19

• requires strong credit
• high interest
• collateral if not payed back

Question 20

advantages of share capital

Answer 20

• large amounts of finance
• lower risk
• no repayment required

Question 21

disadvantages of share capital

Answer 21

• ownership dilution

- higher eventual cost to business through repayments to shareholders

Question 22

advantages of venture capital

Answer 22

• partners can offer expertise and contacts

- no liabilities

Question 23

disadvantages of venture capital

Answer 23

• can be time consuming to find partners

- pay royalties

Question 24

advantages of overdraft

Answer 24

• useful if unsure how much finance is needed
• handles cash flow irregularities
• timely payments

Question 25

disadvantages of overdraft

Answer 25

• can be cut short at any time
• higher rates of interest
• collateral involved
• overdraft may make debtor lethargic about payments

Question 26

advantages of leasing

Answer 26

• reduces impact on short-term cash flow
• replacing by leasing company if item breaks
• not affected by depreciation of asset
• improved liquidity

Question 27

disadvantages of leasing

Answer 27

• costs more than purchase commitment to contact for entire period
• higher fixed costs

Question 28

advantages of trade credit

Answer 28

• positive affect on cash-flow

Question 29

disadvantages of trade credit

Answer 29

• loses opportunity cost of discounts

Question 30

advantages of grants

Answer 30

• free money
• once you’ve received a grant, you are more likely to receive others (waterfall effect)
• gain credibility (increases brand exposure)

Question 31

disadvantages of grants

Answer 31

• time-consuming to apply for
• small proportion succeed
• strings attached e.g. restrictions and conditions that you have to work to keep