Sources Of Finance

Question 1

What is short term finance?

Answer 1

Aka working capital - needed for the day to day running of the business. Need sufficient cash flow to meet cash outflows.

Question 2

What are the short term sources of finance?

Answer 2

• overdraft
• trade credit
• factoring
• hire-purchase

Question 3

Whats an overdraft?

Answer 3

When a payment is made out of current account and it exceeds the available balance.
- interest paid on on amount overdrawn

Question 4

What are the advantages of an overdraft?

Answer 4

• flexible so can help wit seasonal fluctuations
• easy to arrange

Question 5

What are the disadvantages of an overdraft?

Answer 5

• borrowing costs are difficult to calculate
• interest rates higher than bank loan

Question 6

What is trade credit?

Answer 6

Deferring payment to supplier in promise that they will pay supplier in set among of time (usually 30-90 days)

Question 7

What are the advantages of trade credit?

Answer 7

• easy to arrange
• entise customers to buy more
• no cash required upfront so helps with fluctuations of cash flow

Question 8

what are the disadvantages of trad credit?

Answer 8

• missing the repayment can end up in penalties and interest
• cash flow problems for suppliers

Question 9

What is factoring?

Answer 9

Where debt is sold to raise finances. Sold to factoring company who offer a certain % of debt to business who needs funds. Will chase up debt from debtor

Question 10

Whats an advantage of factoring?

Answer 10

• assists smoother cash flow + financial planning
• can focus on selling rather than collecting debt
• firm receives most of finance at once

Question 11

What are the disadvantages of factoring?

Answer 11

• % lost of what’s owed
• high costs
• some customers may prefer to deal directly with company

Question 12

What is hire purchase?

Answer 12

A way of buying assets by paying instalments over time

Question 13

What are the advantages of hire purchase?

Answer 13

• large sum isn’t spent all at once - sum is spread
• flexible
• option to purchase at end

Question 14

What are the disadvantages of hire-purchase?

Answer 14

• overall cost is other than buying out right/ up front

Question 15

What is medium term finance?

Answer 15

Normally a period of between 3-10 years

Question 16

What are the examples of medium term sources of finance?

Answer 16

• leasing
• medium-term loan

Question 17

What is leasing?

Answer 17

A from of renting an asset, giving beneficial use without owning it.

Question 18

What are the advantages of leasing?

Answer 18

• predictable cash flows
• asset owner carries the risk
• lower interest than bank loan

Question 19

What are the disadvantages of leasing?

Answer 19

• more expensive (in total) than buying outright
• don’t own asset
• may have to pay up-front deposit

Question 20

What is long term finance?

Answer 20

A period in excess of 10 years. For securing resources for long term growth. Can be done through borrowing of the issue of shares.

Question 21

What are the types of long term finance?

Answer 21

• bank loan
• debentures
• retained profits
• shares
• government assistance
• venture capital and business angels

Question 22

What is a bank loan?

Answer 22

Loan provided over fixed period
Rate of interest fixed or variable
Timing and amount of repayments set

Question 23

What are the benefits of bank loans?

Answer 23

• greater certainty of funding, provided terms complied with
• lower interest rate than bank overdraft
• appropriate method of financing fixed assets

Question 24

What are he drawbacks of bank loans?

Answer 24

• requires security
• interest paid on full amount outstanding
• harder to arrange
• startups + all n=businesses often excluded

Question 25

What is retained profit?

Answer 25

Profit earned from trading successfully

Question 26

What are the advantages of retained profits?

Answer 26

• felxibility
• business owners in control
• low cost

Question 27

What are the drawbacks of using retained profits as a source of finance?

Answer 27

• danger of hoarding profits
• opportunity cost for shareholders

Question 28

What are debentures?

Answer 28

Special type of long term loan available to plc’s.
Two types:
1st type - sells debentures to investors to raise finance (Cary a fixed IR) that the business has to pay debenture holders each year
2nd type - debentures resold to someone else if they need their money back before denture matures

Question 29

What are shares as a source of finance?

Answer 29

Aka as equity finance. only available to a company. For plc can be traded on stock market. Shareholders entitled to dividend

Question 30

What is government assistance as a source of finance?

Answer 30

Tax incentives
Sale of land/ property at a discount
Lower rent
Grants

Question 31

What is venture capital/ business angels as a source of finance?

Answer 31

Individuals or firms that lend money, known as venture apical, to small/ medium sized business that require finance for start-up/ expansion.
Business angels - offer advice, contacts

Question 32

Whats the risk with venture capitals?

Answer 32

Likely to have been declined by other sources of finance so is a gamble - high risk of failure

Question 33

what is external finance?

Answer 33

Provided ny people or institutions outside business. Included share capital, bank loan/ overdraft, debentures, venture capital, supplier

Question 34

What factors influences a businesses choice of finance?

Answer 34

• the length of time inv - how long it will take
• legal structure - if not company then restricted as cant issue shares
• quantitative factors - measurable
• qualitative factors - non measurable - views + opinions
• external factors - economy
• security - lack of security = less likely to be granted loans
• the current methods being used