D1 sources of finance

Question 1

What is retained profit ?

Answer 1

It is profit kept in a business to fund future expenditure

Question 2

what are advantages of retained profit ?

Answer 2

No interest charges
available immediately
no loss of ownership

Question 3

what are disadvantages of retained profit ?

Answer 3

Amount available may be limited
not available for alternative purposes

Question 4

What are net current assets ?

Answer 4

Current assets minus current liabilites shows the money available to fund day to day expenditure.

Question 5

what is an advantage of a net current asset ?

Answer 5

It encourages businesses to manage cash flow effectively

Question 6

What are disadvantages of net current assets ?

Answer 6

can put pressure on customers
lower stock holdings can affect the firms ability to meet customer needs.

Question 7

What is sale of assets ?

Answer 7

It is selling an item of worth owned by a business in order to achieve an immediate cash injection

Question 8

What are advantages of sale of assets ?

Answer 8

No interest charged
Reducing capital tied up in assets releasing it for other purposes

Question 9

what are disadvantages of sale of assets ?

Answer 9

It can increase costs in the long run of an asset needs to be leased back

Question 10

What are internal sources of finance ?

Answer 10

Money available to fund expenditure from within the business

Question 11

what are external sources of finance ?

Answer 11

Money available from outside of the business

Question 12

What is owners capital ?

Answer 12

This is money invested in the business from the owners personal savings

Question 13

what are advantages of owners capital ?

Answer 13

No interest payments or need to repay.
High level of commitment from the owner

Question 14

what are disadvantages of owners capital ?

Answer 14

Amount available is likely to be limited.

Question 15

what are loans ?

Answer 15

It is money borrowed from a financial institution normally for a set period of time and for a specific purpose . Interest is payable.

Question 16

what are advantages of loans ?

Answer 16

Regular pre-agreed repayment make planning and budgeting relatively easy. Ownership or control is not lost.

Question 17

what are disadvantages of loans ?

Answer 17

Interest is charged on the amount borrowed.

Question 18

What is crowdfunding ?

Answer 18

It involves attracting investment from a large number of investors many of whom may invest relatively small amount. Normally make use of the internet to attract investors

Question 19

What are advantages of crowdfunding ?

Answer 19

Offers the ability to raise finance from A larger number of investors .
No interest is paid as investors will only be rewarded if the business is successfully sold on at a later date

Question 20

what are disadvantages of crowdfunding ?

Answer 20

Partial loss of ownership
No guarantee that the crowd fund will attract sufficient investment to meet the proposal

Question 21

What are mortgages ?

Answer 21

It is a long term loan normally around 25 years that are secured against a specific asset for example a building. Interests are payable

Question 22

What are advantages of mortgages ?

Answer 22

Large amounts of finance can be raised and repaid over a prolonged period of time. Ownership or control is not lost

Question 23

what are disadvantages of mortgages ?

Answer 23

Interest is charged on the amount borrowed

Question 24

What is venture capital ?

Answer 24

This is the investment from an experience entrepreneur in return for a stake equity in the business

Question 25

What are advantages of venture capital ?

Answer 25

Finance is provided by a business professional who will often offer advice and mentoring alongside the investment.

Question 26

what are disadvantages of venture capital ?

Answer 26

Partial loss of ownership and control Conflict can arise between the entrepreneur and venture capitalist

Question 27

What is Debt factoring ?

Answer 27

This involves the selling on of a businesses debts to a third party in order to receive the cash quickly . The factor company pays the business a percentage of the money owed and takes on the responsibility to chase the debts which need to be repaid.

Question 28

what are advantages of debt factoring ?

Answer 28

Speeds up the flow of cash into the business from debt The factor company takes on the risk of bad debt

Question 29

what are disadvantages of debt factoring ?

Answer 29

Only receive a percentage of the amount owed , therefore reducing profits Can give the wrong impression

Question 30

What is Hire Purchase ?

Answer 30

It involves paying to use an asset in instalments to spread the cost over its useful life and provides a source of finance

Question 31

What are advantages of Hire purchase ?

Answer 31

Avoids the need to pay a lump sum for the use of an asset. Regular instalments make planning and budgeting easier Spreads the cost of an asset over its life to avoid paying a lump sum up front.

Question 32

what are disadvantages of Hire purchase ?

Answer 32

Overall amount paid for the use of an asset is likely to be higher than if purchase outright

Question 33

what is leasing ?

Answer 33

It involves paying to use an asset in instalments to spread the cost over its useful life and hence providing a source of finance

Question 34

What are advantages of leasing ?

Answer 34

Responsibility for maintaining and repairing the assets stays with the supplier

Question 35

what are the disadvantages of Leasing ?

Answer 35

Overall amount paid for the use of an asset is likely to be higher than if purchased outright. Never actually own the asset and therefore payments are ongoing.

Question 36

What is Trade Credit ?

Answer 36

It is a period of time offered by suppliers to allow the customers to purchase a good or service now and pay at a later date, for example 30 days after a purchase

Question 37

What are advantages of Trade Credit ?

Answer 37

Delay the need to pay for goods and services purchased therefore helping cash flow. No loss of ownership and control

Question 38

what are disadvantages of trade credit ?

Answer 38

Potential loss of discount offered for cash payments. Only suitable as a short term source of finance

Question 39

What are grants ?

Answer 39

This is a lump sum provided to a business by the government or another organisation to be used for a specific purpose

Question 40

what are advantages of grants ?

Answer 40

No need to repay and no interest charges No loss of ownership or control

Question 41

What are disadvantages of grants ?

Answer 41

Often require a length application process Might only be awarded if certain conditions are met affecting the way the business operates on a day to day basis

Question 42

What are Donations ?

Answer 42

These are sums of money given voluntarily to a charity or social enterprise

Question 43

What are advantages of donations ?

Answer 43

No need to repay and no interest charges No loss of ownership or control

Question 44

What are disadvantages of Donations ?

Answer 44

Likely to be small amount only Unpredictable

Question 45

What is peer to peer lending ?

Answer 45

This involves one business person lending money to another business person in return for interest payements

Question 46

what are advantages of peer to peer lending ?

Answer 46

Interest rate can be lower than lending from more traditional financial institutions

Question 47

what are disadvantages of peer to peer lending ?

Answer 47

Amount available may be limited and provided for a short period of time only.

Question 48

What is invoice discounting ?

Answer 48

These are reductions offered to customers making a product or service cheaper, often applied as a percentage

Question 49

What are advantages of invoice discounting ?

Answer 49

No need to repay and no interest charges No loss of ownership or control Reduces costs to the business so increases profit

Question 50

what is a disadvantage of Invoice discounting ?

Answer 50

Often only available of purchases are paid in cash which affects cash flow