Business finance

Question 1

What are some sources of Internal and External finance?

Answer 1

INTERNAL:
Retained profit
Working capital
Sale of assets

EXTERNAL:
Hire purchase
Sale and Leaseback
Bank loan
Overdraft
Debt factoring
Gov

Question 2

What are the advantages of debt factoring?

Answer 2

Receives large amount of the debt immediately

Good source of short term finance

Reduces the risk of bad debt

Question 3

What are the disadvantages of debt factoring?

Answer 3

Reduces the profitability of the firm

May impact the reputation of the firm

Question 4

What are the advantage of an overdraft?

Answer 4

Quick source of finance
Only pay for the money borrowed
Only borrowed when required allowing flexibility

Question 5

What are the disadvantages of an overdraft?

Answer 5

The bank can call it in at any time
Only available for a current bank account
Have to pay interest on the amount borrowed

Question 6

What are the advantages of retained profits?

Answer 6

Avoids interest payments
Doesn’t dilute the businesses ownership

Question 7

What are the disadvantages of retained profit?

Answer 7

Only an option if they have retained profit
May cause shareholder dissatisfaction if this is at the expense of dividend payments

Question 8

What are the advantages of share capital?

Answer 8

Only need to pay dividends if a profit is being made and the amount of dividend is not fixed
Possible to raise large amounts of finance
No interest repayments

Question 9

What are the disadvantages of share capital?

Answer 9

Loss of ownership as shareholders are part owners
Potential risk of loss of control for a Plc with a threat of hostile takeovers

Question 10

What are the advantages of loans?

Answer 10

Quick and easy to secure
Fixed interest allows business to budget
Improved cash flow
No loss of control

Question 11

What are the disadvantages of loans?

Answer 11

Interest must be paid regardless
A firm that is highly geared may be seen as a higher risk
Often more expensive sources of finance

Question 12

What are the advantages of venture capital?

Answer 12

Potential for large sums of money for investment
Expertise to help the business
Makes it easier to attract other sources of finance
Provides the required capital for expansion

Question 13

What are the disadvantages of venture capital?

Answer 13

A long and complex process
Expert financial projections are likely to be required
Initially expensive for the firm e.g. legal and accounting fees
Partial loss of ownership
Risk of conflict or perceived interference

Question 14

What is trade-credit ?

Answer 14

Buying raw materials / stock to be repaid for a later date(30-90 days)

Question 15

What are the advantage and con of trade-credit?

Answer 15

Improves cash flow(Inflows)

IF payments are missed can ruin trust or have a fee (Extra cost)

Question 16

What is hire-purchase ?

Answer 16

Business agrees to a contract to acquire an asset paying an initial price and paying the rest with interest over time

Question 17

What are the advantages and cons of Hire-purchase?

Answer 17

Spread costs(Cash flow)
Flexible

Repossession

Question 18

What is Leasing?

Answer 18

Renting a piece of machinery or equipment.

Question 19

What are the advantages and cons of Leasing?

Answer 19

If out-of-date can change
cheaper short-term
Cash flow

Expensive long-term