Raising Finance

Question 1

Why do businesses need finance

Answer 1

They need finance to buy fixed assets like factories and machinery
Finance is also needed to pay day to day costs like wages

Question 2

What is a source of finance?

Answer 2

Provider of finance e.g. bank

Question 3

When choosing a source of finance, name 3 things a business must consider

Answer 3

1. Amount of money required
2. Level of risk involved
3. Cost of the finance

Question 4

INTERNAL SOURCES

Owners capital

Answer 4

is the money the owner invests in the business often personal savings
- sole traders or partnerships are likely to use this source of finance
- easy to access and doesnt need paying back

Question 5

Selling assets

Answer 5

-businesses can sell assets to generate capital
-only appropriate for businesses with spare assets
-don’t need to pay interest on money they raise

Question 6

Retained profit

Answer 6

• Profit can be retained and built up over time for later investment
• not all businesses use this source of finance
• Dont have to pay interest on it

Question 7

EXTERNAL SOURCES
Friends and family –

Answer 7

Owners from a new business may ask friends or family to help them out financially

Question 8

Banks

Answer 8

common source of finance for all different types of businesses
- they can offer methods of finance e.g. loans, mortgages
- banks often have strict lending criteria

Question 9

Peer - to - peer lender

Answer 9

operate online
- allow individuals to lend money to other individuals or businesses
- usually have a lower rate of interest

Question 10

Crowd funding

Answer 10

• Raising money from a large number of people usually via the internet
• business raises awareness of its products or brands to people using the websites

Question 11

Methods of finance

Answer 11

Methods of finance

Question 12

Overdraft

Answer 12

• Where a bank lets a business have a negative amount of money in bank account
• Easy to arrange and flexible

Question 13

Leasing

Answer 13

• If business doesnt have enough money to buy new assets they can lease them instead
• it means paying monthly sums of money over a set period of time
• AD- doesnt have to pay a large-up front sum of money
  -DIS- can be more costly in long run

Question 14

Grants

Answer 14

-Fixed sum of money given to a business often by the government
- doesnt have to be paid back
- can be long and time consuming and couldnt get the grant in the end

Question 15

Trade Credit

Answer 15

when a business buys a good or service and doesnt have to pay straight away
- help a business with cash flow
- fail to pay trade credit on time can be bad for the business

Question 16

Loans

Answer 16

• Loans is where a fixed amount of money is borrowed and paid back over a fixed period of time with interest
• Good long term source of finance

Question 17

Share capital

Answer 17

Ltd and PLC can be financed by using ordinary share capital
- money doesn’t need to be repaid
- drawback of selling shares is that the original owner(s) no longer own all of the business

Question 18

Venture capital

Answer 18

• Money that can be used as a method of finance for a business that is high risk but has potential to be successful
• can be provided by business angels

Question 19

Limited liability

Answer 19

Owners are personally responsible for the debts of the business
- they have separate legal identity from its owners so PLC and Ltd have both limited liability

Question 20

Unlimited liability

Answer 20

-The business and the owners are seen as one under the law
- means that any business debts become the personal debts of the owners

Question 21

Where do Internal finances come from>

Answer 21

Within the business e.g.
a) Owner’s money
b) selling assets
c) putting rofits back into the business

Question 22

Wha is Owners capital?

Answer 22

Money the owner invests in the business (often from their personal savings)

Question 23

Who is likely to use Owners capital as a source of finance

Answer 23

Sole trader or partnerships
(often small businesses so don’t need large sums or cannot access ther sources of finance