Sources of Finance

Question 1

Retained profit

Answer 1

Profit after tax retained in a company rather than paid out to owners or shareholders as dividends

• Internal

Question 2

Sale of unwanted assets

Answer 2

Assets that are no longer used by the business can be sold to gain money (revenue)

• Internal

Question 3

Selling existing inventory

Answer 3

Selling inventory to generate revenue (raw materials, components, WIP, finished products). This reduces the working capital needed by the business.

• Internal

Question 4

Sale and leaseback of non-current assets

Answer 4

Selling non-current assets still needed by the firms to generate a large amount of cash — then leasing them back so the business can continue to use them

• Internal

Question 5

Hire purchase

Answer 5

A company purchases an asset and agrees to pay fixed repayments over and agreed time period. The asset belongs to the purchasing company once the final payment has been made.

• External (Long-term)

Question 6

Leasing

Answer 6

Obtaining the use of an asset and paying a leasing charge over a fixed period, avoiding the need to raise long-term capital to buy the asset. The asset is owned by the leasing company.

• External (Long-term)

Question 7

Share capital

Answer 7

Permanent finance raised by companies through the sale of shares.

• External (Long-term)

Question 8

Debentures

Answer 8

Long term bonds issued by companies to raise debt finance, often with a fixed rate of interest.

• External (Long-term)

Question 9

Bank loans

Answer 9

Loans from a bank that do not have to be repaid at least one year.

• External (Long-term)

Question 10

Business mortgage

Answer 10

Long term loans to companies purchasing a property for business premises (factory), with the property acting as collateral security on the loan.

• External (Long-term)

Question 11

Government grant

Answer 11

A one-off payment from a country’s government to support small businesses or to those businesses expanding in developing regions of a country

• External (long-term)

Question 12

Venture Capital

Answer 12

Investment for small companies (not on the Stock Exchange) from specialist organization or wealthy individuals. They are prepared to land risk capital or purchase shares, to business start ups or to SME’s

• External (long-term)

Question 13

Bank overdraft

Answer 13

A credit that a bank agrees can be borrowed by a business up to an agreed limit as and when required.

• External (short-term)

Question 14

Trade credit

Answer 14

Suppliers offer businesses the opportunity to delay the payment for inventories they have purchased, in effect, obtaining finance. The suppliers become “trade payables or trade creditors”

• External (short-term)

Question 15

Debt factoring

Answer 15

Selling of claims over trade receivables (debtors) to a specialist organization (debt factor) in exchange fir immediate liquidity.

• External (short-term)

Question 16

Microfinance

Answer 16

Providing finance services for poor and low-income customers who do not have access to the banking services, such as loans and overdrafts, offered by traditional commercial banks.

• External (N/A)

Question 17

Crowdfunding

Answer 17

The use of small amounts of capital from a large number of individuals to finance a new business venture.

• External (N/A)