mr jey 18nth march

Question 1

owners capital

Answer 1

This is money introduced by the existing owner of the business.
It is an internal source of finance

Question 2

advntage of owners capital

Answer 2

No interest or repayments
No need to profits with new partners) or through dividends to shareholders.
No loss of control of the business

Question 3

disadvantage of owners capital

Answer 3

There may not be enough cash available from the current owner
It is a slow way of financing expansion, so you may miss out on profits

Question 4

Partners capital

Answer 4

This involves either changing from a sole trader to a partnership, adding a new partners to an existing partnership or existing partners contributing additional capital

Question 5

advantages of partners capital

Answer 5

No interest or repayments
New partners can add expertise and share workload

Question 6

disadvantages of partners capital

Answer 6

Control and profits must be shared with any new partners
It may not be possible to find new partners able to contribute the required capital
They are a permanent external source of finance

Question 7

Ordinary shares

Answer 7

Shares are issued by limited companies: they cannot be issued by sole traders or partnerships. Shareholders are the owners of a company, and can vote at the AGM

Question 8

advantages of shares

Answer 8

No interest or repayments
Dividends on ordinary shares depend on what the company can afford
No security is needed
They reduce the level of gearing

Question 9

disadvantages of shares

Answer 9

Part of the profits will always have to be paid to the additional shareholders
Loss of control if over 50% of the company is sold to ordinary shareholders
Large amounts paid in dividends every six months can damage cash flow

Question 10

debentures

Answer 10

They are long-term loans to a company that are secured on the assets of that company.
Debenture holders receive a fixed amount of interest each year.
They are repaid in full at the agreed date.
They are a long term external source of finance

Question 11

advantage on debentures

Answer 11

No loss of control of the company (unlike shares)
No repayments at all for several years (unlike bank loans)
After the agreed date, no more interest or repayments are needed (unlike shares)

Question 12

disadvantages of debenture

Answer 12

Interest is payable whether the company can afford it or not
Large repayments in one lump sum can damage cash flow at that time
They increase the level of gearing
They usually need security

Question 13

bank loan

Answer 13

It is a fixed amount that must be repaid, plus interest, over a stated amount of time in equal monthly instalments.
Security must often be provided.
It is a long term external source of finance

Question 14

advantage of bank loan

Answer 14

No more repayments after a set period of time (unlike dividends for shares)
No loss of ownership of the business (unlike shares)
No large lump-sum repayments, which is good for cash flow

Question 15

disadvantages of bank loan

Answer 15

Interest is an additional cost to the business
Repayments must be made whether or not the business can afford them
Increases the level of gearing
Usually needs security

Question 16

mortgage

Answer 16

It is a bank loan that is used to buy property and is secured on that property.
It is a long term external source of finance

Question 17

advntages of mortgages

Answer 17

No more repayments after a set period of time (unlike dividends for shares)
No loss of ownership of the business (unlike shares)
The monthly repayments are an affordable way of buying property

Question 18

disadvantages of mortgages

Answer 18

Interest is an additional cost to the business
The property is used as security, so it can be taken if unable to keep up the repayments
Increases the level of gearing
The large initial deposit may cause cash flow problems.

Question 19

bank overdraft

Answer 19

This means that the bank account is allowed to have a negative balance. Interest is paid on the exact amount overdrawn, and security may be required.
It tends to be used for short-term borrowing rather than long-term borrowing
The overdraft facility must be agreed with the bank before the business is able to become overdrawn.
It is a short term external source of finance

Question 20

advantages of bank overdraft

Answer 20

They are flexible: you borrow exactly how much you need, so no unnecessary interest
No loss of ownership of the business
They are repaid when the business is able to do so

Question 21

disadvantages of bank overdraft

Answer 21

Interest is an additional cost to the business
The rate of interest is often higher than on bank loans
The overdraft facility can be cancelled by the bank without any notice