Sources Of Finance

Question 1

Internal finance?

Answer 1

Finance that comes from within a business e.g using income previously earned by the business

Question 2

External finance

Answer 2

Sourced outside of the organisation - finance providers will be expecting a return

Question 3

What is meant by debt factoring

Answer 3

Business sells its outstanding customer accounts (those who have not paid their debts to the business) to a debt factoring company. The company pays the business 80-90% of face value and then colllects full debt later.

Question 4

What is meant by an overdraft

Answer 4

Business that make payments from the business current account exceeding the available cash balance. Enables business to obtain short term funding.

Question 5

What is meant by share capital

Answer 5

Private and public companies can raise finance by selling new shares in the company.

Question 6

Two options for selling shares?

Answer 6

1) Flotation - new issues of shares / selling a percentage of a company’s shares on the stock market
2) A right issue - issue new shares, offering them first to existing share holders

Question 7

What is meant by a loan

Answer 7

Amount of money borrowed for a set period with an agreed repayment schedule

Question 8

What is venture capital

Answer 8

Venture capital is investment in exchange for an equity stake within the business

Question 9

What is venture capitalist stake dependent on and how can a venture capitalist earn the returns?

Answer 9

Determined on: the growth and profitability of a business

Return earned when venture capitalists exits by selling shares within the business to another owner

Question 10

Internal and external sources of finance

Answer 10

External include

• overdrafts
• loans
• debt factoring

Internal

• retained profits
• Share capital
• Venture capital