Sources of Finance

Question 1

What is sources of finance?

Answer 1

where money comes from to fund the business

Question 2

Why is finance needed for stating up?

Answer 2

• buing stock / raw materials
• capital equipment / furniture
• marketing / advertising
• vechiles

Question 3

Why is finance needed for growing the business?

Answer 3

• more marketing
• buying other businesses
• partner with other companies
• increase stock

Question 4

What is long term finance?

Answer 4

• finances the whole business over many years

Question 5

Examples of long term finance?

Answer 5

• share capital
• retained profits
• venture capital
• mortgages
• long-term bank loans

Question 6

What is medium term finance?

Answer 6

finances major projects or assets with a long life

Question 7

Examples of medium term finance?

Answer 7

bank loans
leasing
hire purchase
government grants

Question 8

What is short term financing?

Answer 8

finances day to day trading of the business

Question 9

Examples of short term financing?

Answer 9

• bank overdraft
• trade creditors
• short-term bank loans
• factoring

Question 10

What are the 4 factors influencing the choice and amount of finance required?

Answer 10

• what is the finance required for?
• the cost of the finance
• flexibility of the finance
• the business organisational structure

Question 11

What are the main internal sources of finance for a start up business?

Answer 11

• founder finance

- friends and family

Question 12

What are the main sorces of external finance for a start up business?

Answer 12

• business angles
• loans and grants
• crowdfunding
• bank loan
• bank overdraft

Question 13

What is founder finance?

Answer 13

varies personal sources of the entrepeneur

Question 14

Give examples of founder finance?

Answer 14

• cash and investments
• redundancy payments
• inheritances
• personal credit cards
• re-mortgaging
• putting free time into the business

Question 15

What are some benifits of personal sources of finance?

Answer 15

• no interest (cheaper)
• not paying anyone back
• less stressful
• less delay
• more founder puts in, more others will invest

Question 16

What are some internal sources for established businesses?

Answer 16

• retained profits
• working capital
• asset disposal

Question 17

What are some external sources for established businesses?

Answer 17

• share issues
• bank loans and overdrafts
• peer to peer lending
• debentures
• venture capital
• supplier finance
• debt factoring

Question 18

Why can start-up businesses not use retained profits?

Answer 18

new businesses wont have any retained profits

Question 19

What are benefits of retained profits?

Answer 19

• cheap
• very flexible
• shareholders control the proportion retained
• dont dilute ownership of company

Question 20

What are disadvantages of retained profits?

Answer 20

• danger of hoarding cash
• shareholders may prefer dividends if the business is not achieving sufficiently high returns on investment
• high profits and cash flows would suggest the business could afford debt

Question 21

What is working capital?

Answer 21

the capital of a business which is used in every-day trading

Question 22

What is asset disposal?

Answer 22

-selling assets for money

Question 23

key parts to asset disposal?

Answer 23

• one of boost to finance
• not all businesses have them
• (land, surplus equipment)

Question 24

What are share issues?

Answer 24

giving shares of your company for money

Question 25

Advantages of share issues?

Answer 25

- raise substantial funds - broader base of share holders - equity rather then debt means low risk

Question 26

Disadvanategs of share issues?

Answer 26

- can be costly and time consuming | - existing shareholders' holdings may be diluted

Question 27

What are bank loans?

Answer 27

money given by the bank but they expect interest

Question 28

Key things about bank loans?

Answer 28

- medium or long term - loan over fixed period - rate of interest either fixed or varied - generally lower interest rate then overdraft - not much flexibility

Question 29

What is a bank overdraft?

Answer 29

bank lets business owe it money when balance goes below 0 in return for high interest - flexible - long term - great for helping businesses through seasonal fluctuations

Question 30

Bank over draft advanatges?

Answer 30

- relatively easy to arrange - felxible only pay back interest on amount borrowed - not secured on assets of business

Question 31

Disadvanatges of bank overdraft?

Answer 31

- withdrawn at short notice - interest charge varies with changes in interest rate - higher interest then bank loan

Question 32

Advantges of bank loan?

Answer 32

- greater certainty of funding - lower interest then overdraft - appropriate method of financing fixed assets

Question 33

Disadvanatges of bank loan?

Answer 33

- requires security money - interest paid on full amount outstanding - harder to arrange

Question 34

What is debt factoring?

Answer 34

if people owe you money you sell the debt to a third party in return for a fee, typically 10-20% of debt value

Question 35

Advantages of debt factoring?

Answer 35

- solves cash flow problems - use money to continue to trade - quick - reduces admin

Question 36

Disadvantages of debt factoring?

Answer 36

- loss of revenue | - customer reputation worsening

Question 37

What is a debenture?

Answer 37

form of bond or long term loan issued by the company, usually with fixed interest rate

Question 38

Main info on debentures?

Answer 38

- long term (10-20 years) - issued by company - fixed rate of interst - can be traded

Question 39

What is venture capital?

Answer 39

specialist investors in private companies for a large share

Question 40

Main criteria of venture capital?

Answer 40

- manage investment funds designed to achive high rates of returns - focus on larger investments (£1 mil+) - seek large shares of share capital and representation on the board - look to sell investment in the medium term (5-7 yrs)

Question 41

Advantages of venture capital?

Answer 41

- can raise substantial amounts - business benefits from specialist investor support - brings better dicipline to management and startergy

Question 42

Disadvantages of venture capital?

Answer 42

- venture capitalist requires a high rate of return - investmnet often supported by a high-level of bank debt in business - not a long term investment (sell within 5-7 years) - loss of control

Question 43

What is supplier finance?

Answer 43

delaying payment of bills, suppliers provide goods and services in advance of payment = trade creditors as business expands the amount owed to suppliers at any one time also grows

Question 44

What is peer to peer mentoring?

Answer 44

way for businesses to raise loan finances without using banking. involves raising a loan from a group of individuals or institutions and is a very flexible source of borrowing, minimum loan of 5000 - 50 000 and from 6 months to a year - unsecured, - connects businesses looking for finance with individuals willing to invest or loan - managed by online intermediaries

Question 45

What is crowd funding?

Answer 45

- type of peer to peer funding a business or entrepeneur can attract a crowd of investors - each of whom take a small stake by contributing towards an online fundraising target