AS2 TP8

Question 1

what are the possible sources of finance of a sole trader

Answer 1

owners savings, banks, government grants

Question 2

what issues could rise from these sources of finance

Answer 2

loss of control from owner
financial history of business
security for those lending funds

Question 3

possible sources of finance of a private limited company (LTD)

Answer 3

banks, venture capital institutes, private share sales

Question 4

issues that could rise from these sources of finance

Answer 4

disagreement among existing shareholders
difficulty finding suitable shareholders
risk of a loan

Question 5

possible sources of finance of a public limited company (PLC)

Answer 5

banks, venture capital institutes and public share issues via stock exchange

Question 6

issues that could rise from these sources of finance

Answer 6

state of market/economy
recent financial performance
business reputation

Question 7

what is internal sources of finance

Answer 7

can be obtained within business and carries no additional cost to business

Question 8

what is retained profit

Answer 8

profits from previous years reinvested back into business for growth and expansion

Question 9

advantages retained profit

Answer 9

no debt
no interest payments
no cash flow problems for repayments

Question 10

disadvantages of reinvesting profits

Answer 10

only applies to existing business that can retain profit

may not have enough retained profit

Question 11

what is controlling working capital

Answer 11

reducing costs, delaying outflows and speeding up inflows
purpose is for start ups for sole traders and partnerships

Question 12

advantages of controlling working capital

Answer 12

no debt
no cash flow issues for repayment
doesn’t attract interest payments

Question 13

disadvantages of controlling working capital

Answer 13

limited liability
owners can lose their investment

Question 14

what is sale of assets (source of finance)

Answer 14

disposal of assets no longer required by business, purpose is to increase cash quickly for day 2 day running of business

Question 15

advantages of sale of assets

Answer 15

raises finance quickly without requiring debt/ interest charges

Question 16

disadvantage of sale of assets

Answer 16

very few business’ have assets for sale that won’t affect their operation

Question 17

what is an overdraft (external source of finance)

Answer 17

an agreement with a bank to be allowed to overdraw a certain amount purpose is to assist with everyday running of business

Question 18

advantages of an overdraft (short term)

Answer 18

very flexible form of finance as amounts borrowed vary

simple to arrange - established business customers can usually increase limit easily

banks are more receptive to overdrafts as they are short term and confined to certain amount and time period

Question 19

disadvantages of overdraft

Answer 19

overdrafts can be quite expensive as have high interest

banks can demand immediate repayments

large penalty charges If overdraft amount is exceeded

Question 20

what are bank loans

Answer 20

amount of money loaned by bank with an agreed interest rate and specified monthly repayments

Question 21

advantages of bank loans

Answer 21

business keeps ownership and control intact while loan is being repaid

interest rate is fixed and cannot be changed over course of loan

Question 22

disadvantages of bank loans

Answer 22

if bank lending capital considers the loan in any way risky they can charge higher interest rate

banks often require security for their loans usually in terms of property known as collateral

Question 23

what is hire purchase

Answer 23

loan by a lender that pays the full amount of a purchased asset

Question 24

advantages of hire purchase

Answer 24

allows business to purchase assets without having the full finance to hand over

business pays small deposit and repays the balance monthly

assets belong to business on final payment

Question 25

what is leasing

Answer 25

renting an item

Question 26

advantages of leasing

Answer 26

as equipment is leased and not owned if it breaks leasing company pays repairs asset never has to belongs to business equipment can be replaced or updated quickly

Question 27

disadvantages of leasing

Answer 27

business never actually owns item can become expensive long term

Question 28

what is trade credit

Answer 28

suppliers allow customers extra time to pay for goods purpose to help with cash flow

Question 29

advantages of trade credit

Answer 29

business has sold inventory aids with cash flow

Question 30

disadvantages of trade credit

Answer 30

suppliers can renew trade credit agreement and reduce time period causing cash flow problems

Question 30

what is debt factoring (medium term)

Answer 30

use of a company to collect all debts owned to business business can sell these bills owed to them to banks for immediate cash

Question 31

advantages of debt factoring

Answer 31

immediate cash provided means firm is likely to have lower overdraft requirements and pay lower interest improves cash flow

Question 32

disadvantages of debt factoring

Answer 32

business dent receive full amount as lender charges a fee if they have difficulty claiming money from debtor business may be required to pay full amount

Question 33

what is sale and leaseback

Answer 33

business sells its premises for full value and rents from new owner

Question 34

advantages of sale and leaseback

Answer 34

sale of premises releases major funds enabling business to expand and grow no repayments, interest but earn interest on deposits

Question 35

disadvantages of sale and leaseback

Answer 35

rent now payable to new owner reducing profits new owner can increase rent

Question 36

what is venture capital

Answer 36

people invest in the company when its unable to float on stock market purpose is to invest in early stages usually on high risk start ups with high potential

Question 37

advantages of venture capital

Answer 37

strive to increase company profits and dividends as they are shareholders venture capital investors don't only provide capital but experience, contacts and advice

Question 38

disadvantages of venture capital

Answer 38

they can sell on they shareholding to others when they have reached target returns

Question 39

what are mortgages (long term)

Answer 39

long term loan to purchase land and premises

Question 40

advantages of a mortgage

Answer 40

gives business long time to repay

Question 41

disadvantages of a mortgage

Answer 41

possible for total repayment to double depending on interest and time its repaid value of premises may not increase and mortgage may decrease over time

Question 42

what is share capital

Answer 42

private and public limited companies can raise new finance by selling new shares

Question 43

advantages of share capital

Answer 43

provides route to raise substantial capital from existing and new shareholders no interest or repayments due

Question 44

disadvantages of share capital

Answer 44

ownership is diluted with increased shareholders have to pay increased dividends as shareholders increase

Question 45

what are debentures

Answer 45

large plc's can obtain finance through issuing a long term loan to parties who aren't shareholders of company and the debt can be sold to other parties

Question 46

advantages of debentures

Answer 46

fixed rate of interest is paid throughout debenture period future cash flow commitments are known in advance debenture loans are more secure than investing shares in company

Question 47

disadvantages of debentures

Answer 47

debenture interest is payable regardless if business is profitable