Finance - Sources of Finance

Question 1

What are the types of short-term sources of finance ?

Answer 1

Bank Overdraft
Government grant
Retained profit
Trade credit
Leasing
Hire purchase

Question 2

What is a bank overdraft ?

Answer 2

allows a business to over draw an amount of money from their bank account

Question 3

What are the advantages of a bank overdraft ?

Answer 3

1. Easy to set up
2. Quick to access finance

Question 4

What are the disadvantages of a bank overdraft ?

Answer 4

1. must be paid back quickly or can be expensive due to high interest rates

Question 5

Who are Bank overdrafts available to ?

Answer 5

Soletrader
Partnership
Private limited company

Question 6

What is a government grant ?

Answer 6

Given to encourage entrepreneurs to start a new business or open a business in a particular area by offering expert knowledge as well as financial assistance

Question 7

What are the advantages of a Government grant ?

Answer 7

1. Provides finance which doesn’t need to be repaid

Question 8

What are the disadvantages of a Government grant ?

Answer 8

1. one-off payment
2. you need to meet the criteria

Question 9

Who is a Government grant available to ?

Answer 9

Soletrader
Partnership
Private limited company
Social enterprise

Question 10

What is retained profit ?

Answer 10

A business saves a portion of its profits and reinvests back into the company

Question 11

What are the advantages of retained profit ?

Answer 11

1. profit belongs to the company, so owner is in control

Question 12

What are the disadvantages of retained profit ?

Answer 12

1. May run out of retained profits quickly
2. Relying on profits is risky, as some months a business may not make profits

Question 13

Who is retained profit available to ?

Answer 13

Soletrader
Partnership
Private limited company
Social enterprise

Question 14

What is trade credit ?

Answer 14

This is when a business can purchase goods from suppliers with a delayed payment (buy now pay later)

Question 15

What are the advantaged of trade credit ?

Answer 15

1. can sell goods using materials not yet payed for, improving cash flow

Question 16

What are the disadvantages of trade credit ?

Answer 16

1. If a business doesn’t pay on time, there may be a charge
2. If this happens repeatedly, the business may get a ‘poor credit rating’ and be refused credit in the future

Question 17

who is trade credit available to ?

Answer 17

Private sector

Question 18

What is leasing ?

Answer 18

A business can lease vehicles or machinery from other companies. They pay a monthly fee, and the leasing company takes care of the maintenance

Question 19

What are the advantages of leasing ?

Answer 19

1. The leasing company will repair and maintain the machinery, which saves the business money
2. if a business has limited finance this doesn’t require a large initial payment

Question 20

What are the disadvantages of Leasing ?

Answer 20

1. The business will never own the asset
2. in the long run the monthly cost will total to more than it would have cost to by the asset out right

Question 21

Who is leasing available to ?

Answer 21

Soletrader
Partnership
Private limited company

Question 22

What is hire purchase ?

Answer 22

Allows a business to buy an asset and pay it back over a period of time. An initial deposit is required followed by monthly payments

Question 23

What are the advantages of hire purchase ?

Answer 23

1. allows a business to buy expensive machinery with only an initial deposit

Question 24

What are the disadvantages of Hire purchase ?

Answer 24

1. The business does not own the asset until the final month
2. interest also must be paid which can make the asset more expensive in the long run

Question 25

Who is Hire purchase available to ?

Answer 25

Private sector

Question 26

What are the long term sources of finance ?

Answer 26

Owners finance loan from family/ friends bank loan share issue mortgage debt factoring

Question 27

What is owner finance ?

Answer 27

owners use their own savings to invest into the business

Question 28

What are the advantages of owner finance ?

Answer 28

1. The owner has complete control 2. reduces the amount which needs to be borrowed

Question 29

What are the disadvantages of owner finance ?

Answer 29

1. Savings could be small and may not last long 2. Owners with unlimited liability would risk losing their savings

Question 30

Who is owner finance available to ?

Answer 30

Soletrader Partnership Social enterprise

Question 31

What is loan from family and friends ?

Answer 31

A business owner can borrow money from family and friends

Question 32

What are the advantages of loans from family and friends ?

Answer 32

1. The owner may not have to pay an interest on the loan

Question 33

What are the disadvantages of loans from family and friends ?

Answer 33

1. This could lead to arguments or disagreements between family and friends

Question 34

Who is loans from family and friends available to ?

Answer 34

Soletrader Social enterprise

Question 35

What is a bank loan ?

Answer 35

Lend a business money over a certain period of time. paid back in monthly instalments with interest

Question 36

What are the advantages of bank loan ?

Answer 36

1. Regular fixed instalments 2. makes it easier for the business to budget

Question 37

What are the disadvantages of bank loans ?

Answer 37

1. Interest must be paid along with the amount borrowed 2. small business tend to pay a higher interest rate

Question 38

Who is bank loan available to ?

Answer 38

Soletrader Partnership Private limited company Social enterprise

Question 39

What is share issue ?

Answer 39

selling more shares to raise capital for the business

Question 40

What are the advantages of a share issue ?

Answer 40

1. don't need to pay money back 2. a large sum of money can be raised

Question 41

What are the disadvantages of a share issue ?

Answer 41

1. More shareholders means more dividends (profits are shared) 2. Selling shares may result in less control of the business

Question 42

Who is share issue available to ?

Answer 42

Private limited company

Question 43

What is a mortgage ?

Answer 43

A loan from the bank which can only be paid back in monthly instalments

Question 44

What are the advantages of a mortgage ?

Answer 44

1. Can borrow a large sum over a long period 2. monthly payments are agreed with the bank which makes it easier for the business to budget

Question 45

What are the disadvantages of a mortgage ?

Answer 45

1. interest has to be paid back on top of repaying the mortgage

Question 46

Who is mortgage available to ?

Answer 46

Soletrader Partnership Private limited company

Question 47

What is debt factoring ?

Answer 47

a business sells their debt to a debt factoring company

Question 48

What are the advantages of debt factoring ?

Answer 48

1. The business will recoup some of the debt that they own 2. They save the time of having to chase up customers to pay their debt

Question 49

What are the disadvantages of debt factoring ?

Answer 49

1. The business will not receive the full amount of the debt that they are owned

Question 50

Who is debt factoring available to ?

Answer 50

Private sector