Business Finance

Question 1

Define Owner’s Capital

Answer 1

Money invested by the owner of a business that often comes from their personal savings or cash that comes from a change in circumstance (e.g. inheritance)

Question 2

Give 2 advantages of Owner’s Capital

Answer 2

• Can give entrepreneur more control as it does not rely on banks
• No interest is paid

Question 3

Give 1 disadvantage of Owner’s Capital

Answer 3

• Can be a limited amount of money and not enough to meet the needs of a start up business

Question 4

Define Retained Profit

Answer 4

Profit that is generated within the business and reinvested in order to fund expansion

Question 5

Give 1 advantage of Retained Profit

Answer 5

• No interest is paid

Question 6

Give 1 disadvantage of Retained Profit

Answer 6

• Profits may be limited and therefore insufficient

Question 7

Define Sale of Assets

Answer 7

When established businesses are able to sell off assets that are no longer required (e.g. buildings or machinery)

Question 8

Give 2 advantages of Sale of Assets

Answer 8

• The business can gain large sums of money
• No interest is paid

Question 9

Give 1 disadvantage of Sale of Assets

Answer 9

• Smaller businesses are unlikely to have unwanted assets

Question 10

Name 3 internal sources of finance

Answer 10

-Owner’s Capital
- Retained Profit
- Sale of Assets

Question 11

Define Overdraft

Answer 11

When money is withdrawn from a bank account and the available balance goes below zero

Question 12

Give 2 advantages of Overdraft

Answer 12

• Good to cover short term cash flow problems
• Flexible source of finance as businesses will only use it when needed (e.g. emergencies)

Question 13

Give 2 disadvantages of Overdraft

Answer 13

• Can become expensive due to high interest rates
• Bank can demand full repayments within a short period of time

Question 14

Define Trade Credit

Answer 14

When a business is able to obtain raw materials and stock but pays for them at a later date

Question 15

Give 1 advantage of Trade Credit

Answer 15

• allows a business to make a payment once it has had the opportunity to convert the raw materials into products, and receive payment

Question 16

Give 1 disadvantage of Trade Credit

Answer 16

• It has to be paid back so some of the profit is lost

Question 17

Define Debt Factoring

Answer 17

Where a business sells their invoices to a factor such as a bank

Question 18

Give 1 advantage of Debt Factoring

Answer 18

• Improves cash flow as they gain access to some cash right away

Question 19

Give 1 disadvantage of Debt Factoring

Answer 19

• The business does not receive the full value of the invoice

Question 20

Name 3 short- term external sources of finance

Answer 20

• Overdraft
• Trade Credit
• Debt Factoring

Question 21

Define Bank Loans

Answer 21

Money lent to a business that is paid off with interest over an agreed period of time

Question 22

Give 2 advantages of Bank Loans

Answer 22

• The rate of interest is fixed so the business knows the cost of borrowing in advance
• Makes it easier to plan ahead and manage cash flow

Question 23

Give 1 disadvantage of Bank Loans

Answer 23

• There is an increased risk to personal assets because businesses must offer security in the form of property

Question 24

Define Share Capital

Answer 24

The money raised by a business through the sale of shares in the business

Question 25

Give 2 advantages of Share Capital

Answer 25

- Higher levels of financial flexibility - Lower risk of bankruptcy

Question 26

Give 1 disadvantage of Share Capital

Answer 26

- Slows down decision making process

Question 27

Define Venture Capital

Answer 27

Money invested by an individual or group that is willing to take the risk of funding a new business in exchange for an agreed share of the profits

Question 28

Give 1 advantage of Venture Capital

Answer 28

- The entrepreneur doesn't have to pay the full amount back

Question 29

Give 2 disadvantages of Venture Capital

Answer 29

- Venture capitalists want a share of the profit - Venture capitalists want input into how the business is run

Question 30

Define Business Angels

Answer 30

Professional investors that invest in businesses with high growth prospects

Question 31

Give 1 advantage of Business Angels

Answer 31

- Skills, experience, and contacts are all available to the business

Question 32

Give 1 disadvantage of Business Angels

Answer 32

- Entrepreneur has a loss of control over their business

Question 33

Name 4 long- term external sources of finance

Answer 33

- Bank loans - Share Capital - Venture Capital - Business Angels

Question 34

Define Hire Purchase

Answer 34

When a business agrees a contract to acquire an asset by paying an initial instalment and repays the price of that asset plus interest over a period of time

Question 35

Give 2 advantages of Hire Purchase

Answer 35

- Allows a business to spread the cost rather than use large sums of money by paying upfront - Flexible as terms can be between 1 and 5 years

Question 36

Give 1 disadvantage of Hire Purchase

Answer 36

- Once the final payment is made the business would own the asset

Question 37

Define Leasing

Answer 37

Similar to renting a piece of equipment or machinery. The business pays a regular amount over a period of time but the item belongs to the leasing company

Question 38

Give 3 advantages of Leasing

Answer 38

- Cheaper in the short term than buying equipment outright - Equipment can be regularly updated or replaced - Cash flow management is easier due to regular payments

Question 39

Give 1 disadvantage of Leasing

Answer 39

- More expensive long term because the leasing company charges fees

Question 40

Name 2 medium- term external sources of finance

Answer 40

- Hire Purchase - Leasing

Question 41

Define Commercial Mortgage

Answer 41

A sum of money that is borrowed from the bank that is secured against a business property and payed back in instalments over a long period of time

Question 42

Give 2 advantages o0f Commercial Mortgage

Answer 42

- Mortgage is given for a long period of time - Large amounts of finance can be raised quickly

Question 43

Give 2 disadvantages of Commercial Mortgage

Answer 43

- Interest is charged on the loan - Property can be lost to the Mortgage lender if repayments are missed

Question 44

Define Government Grant

Answer 44

A fixed amount of money awarded by the government or charitable organisations

Question 45

Give 1 advantage of a Government Grant

Answer 45

- Does not have to be paid back

Question 46

Give 2 disadvantages of a Government Grant

Answer 46

- Business needs to meet certain criteria - It is time consuming to apply for grants and complete all the paperwork

Question 47

Define Sales and Leaseback

Answer 47

When a business sells a major asset then leases the same asset back from the new owner in order to raise finance

Question 48

Give 2 advantages of Sale and Leaseback

Answer 48

- No interest is charged -Can raise finance quickly

Question 49

Give 1 disadvantage of Sale and Leaseback

Answer 49

-The business will often pay more for the asset in the long run, due to providing a 'profit' in the form of interest to the leasing company

Question 50

Name 3 long and medium-term external sources of finance

Answer 50

- Commercial Mortgage - Government Grant - Sale and Leaseback