Sources of Finance

Question 1

Define internal finance

Answer 1

Money that Comes from within a business

Question 2

Define retained profits

Answer 2

Profits kept within the business to fund future expenditure.

Question 3

Benefits of internal finance

Answer 3

No interest charges
Available immediately
Avoids debt
No loss of ownership

Question 4

Limitations of internal finance

Answer 4

Limited amount.
Reduces divident to shareholders
Once used ut can’t be used for anything else

Question 5

Define net current assets

Answer 5

Shows how much capital the business has for day to day expenditure

Question 6

Benefits of net current assets

Answer 6

Encourages the business to manage cash flow

Question 7

Limitations of net current assets

Answer 7

Pressures customers due to shorter credit terms.
May upset suppliers if longer credit is applied for.
Lower stock may make an impact on how the business meets demand.

Question 8

Define sales of assets

Answer 8

When companies let go of some assets in exchange for needed cash or other forms of compensation.

Question 9

Benefits of sales of assets

Answer 9

No interest charges.
Reduces capital tied up in assets so it can be used else where.
Disposes id unused assets.

Question 10

Limitations of sale of assets

Answer 10

Can increase cost of asset if needs to be eventually replaced.
Often difficult to get an amount close to the value of asset.

Question 11

Define external finance

Answer 11

Money that comes from outside the business

Question 12

Examples of external finance

Answer 12

Owners capital
Loans 
Leasing
Trade credit 
Hire purchase

Question 13

Define owners capital

Answer 13

The money provided to the business from the owners own pocket

Question 14

Benefits of owners capital

Answer 14

No need to pay/repay interest.

High level of commitment from the owner

Question 15

Limitations of owners capital

Answer 15

Limited funds
Personal financial issues
May cause problems if there is more then one owner.

Question 16

Define loans

Answer 16

Money which is provided by a bank or loan provider.

Question 17

Benefits of loans

Answer 17

Regular.
Scheduled payments to make it easier for business to budget.
Terms can be negotiated with provider.

Question 18

Limitations of a business

Answer 18

Interest is changed on repayments.

Loans are secured on a asset which can be taken away if loans are not payed.

Question 19

Define crowd funding

Answer 19

Where project is funded by many strangers using websites etc

Question 20

Benefits of crowd funding

Answer 20

Access to large amount of investors.

Directly appeal to target markets.

Question 21

Limitations of crowd funding

Answer 21

Partial loss of ownership

Not guaranteed to attract enough investment for proposal to be successful

Question 22

Define mortgages

Answer 22

A large loan to purchase and expensive asset

Question 23

Benefits of mortgages

Answer 23

Larges sums of capital can be raised and paid back over a long period of time.

Question 24

Limitations of mortgages

Answer 24

Asset can be repossessed if payments are not made.

Long term financial commitment

Question 25

Define venture capital

Answer 25

A venture capitalist invests in different businesses to make large returns.

Question 26

Benefits of venture capital

Answer 26

Capital provided by a business professional who in knowledgeable. Often take riskier investments.

Question 27

Limitations of venture capital

Answer 27

Partial loss of ownership | Potential conflict with owner and VC

Question 28

Define debt factoring

Answer 28

Where a business sells its debts to another company for quick access for money.

Question 29

Benefits of debt factoring

Answer 29

Speeds up cash flow | The factor business takes on the risk of non payment.

Question 30

Limitations of debt factoring

Answer 30

Only receive a portion of money owed. | Can give out a negative impression

Question 31

Definition of hire purchase

Answer 31

Where am asset is paid over a set period of time. The asset doesn’t belong to the business until it’s fully paid.

Question 32

Benefits of hire purchase

Answer 32

Spreads the costs over time. | Helps maintain cash flow

Question 33

Limitations of hire purchase

Answer 33

Only available on assets such as vehicles. | Will cost the business more than buying it outright.

Question 34

Define leasing

Answer 34

This is where a business pays to use an asset that will not belong to them

Question 35

Benefits of leasing

Answer 35

Repair and maintenance responsibilities sits with the supplier Spreads the costs out

Question 36

Limitations of leasing

Answer 36

More then expensive than buying an asset outright | Assets won’t belong to the business.

Question 37

Define trade credit

Answer 37

Where a business does not have to pay a supplier for goods immediately.

Question 38

Benefits of trade credit

Answer 38

Delays the payments for supplies which increases cash flow

Question 39

Limitations of trade credit

Answer 39

Only suitable for short term solution | Suppliers may offer discounts for immediate payment

Question 40

Definition of grants

Answer 40

Funds that do not need to be payed back

Question 41

Peer to peer lending

Answer 41

Where a business borrows for another business eland pays interest

Question 42

Benefits of peer to peer lending

Answer 42

Terms can be negotiated

Question 43

Limitations of peer to peer lending

Answer 43

Limited amount over a short period

Question 44

Define invoice discounting

Answer 44

Where a supplier will offer a discounts on orders often out of loyalty

Question 45

Benefits of invoice discounting

Answer 45

Reduces the cost of the business | Strengthens relationship with supplier

Question 46

Limitations of invoice discounting

Answer 46

Often only available when payment is upfront, which can create cash flow issues.