Sources Of Finance

Question 1

What are the Internal Sources of Finance? (3)

Answer 1

Owners Capital
Selling Assets
Retained Profit

Question 2

Benefit of Internal Finances? (4)

Answer 2

1. If Business use (example) they won’t incur in any debt.
2. This is because they don’t have to make interest or loan capital repayments
3. Reducing Outflows meaning they’ll likely improve net cash flow
4. Able to pay suppliers and bills without selling non current assets or going into debt

Question 3

Drawback Of Internal Finance? (6)

Answer 3

1. If business use (example) they will limit the amount of capital they can raise
2. Limiting expansion and reducing scale
3. Limiting ability to achieve economies of scale
4. Fixed Costs spread over less units
5. Lower Sales Volume, Revenue and Profit

Question 4

What are the main sources of external finance?

Answer 4

Loan
Overdraft
Business Angel/Venture Capitalist
Peer to peer funding
Crowdfunding
Share Capital

Others: Leasing, Hire Purchase, Trade Credit, Grants.

Question 5

Benefit of Peer To Peer Funding? (5)

Answer 5

1. Can source finance without giving up control
2. Can continue investment into R&D to focus on long term
3. Ensuring a differentiated product
4. Without pressure to keep prices low so shareholders receive dividends
5. Gain a competitive advantage (Porter) and become price inelastic

Question 6

Drawback of Peer to peer funding? (3)

Answer 6

1. Have to pay capital back with interest increasing outflows
2. Leading to a Lower net cash flow
3. Unable to pay for bills or liabilities

Question 7

Benefit of Venture Capitalist?

Answer 7

1. Gain experience and support of finance
2. Gain competitive advantage according to Porter
3. Increases sales volume and orders to suppliers to reduce variable costs and selling price
4. To increase revenue and orders to suppliers for further raw materials, etc

Question 8

Drawback of Venture Capitalist? (4)

Answer 8

1. Have to give equity and profit to the VC.
2. Lose profit to reinvest into things like R&D
3. Cannot fund researchers to struggle differentiation making a price elastic product
4. Pressure to keep prices low leading to lower revenue

Question 9

Crowdfunding - Benefit (2)

Answer 9

1. Don’t require interest payments leading to lower outflows
2. This will increase net cash flow able to pay suppliers and not sell non current assets….

Question 10

Crowdfunding- Drawback (3)

Answer 10

1. Have to give rewards to investors
2. Increase Outflows that’ll lead to a lower net cash flow
3. Possibly having to lower selling price to increase revenue or sell assets

Question 11

Loan - Benefit (3)

Answer 11

1. Increased Inflows and no need to share equity
2. Can keep more retained profit due to no dividend payments to then reinvest the capital into…
3. Link to PED or EOS

Question 12

Loan - Drawback (4)

Answer 12

1. Requires Interest Payments increasing outflows leading to a negative net cash flow
2. Forced to sell assets to pay bills for suppliers
3. Disruption to operations
4. Lower sales volume to benefit from EOS

Question 13

Share Capital - Benefit (3)

Answer 13

1. Don’t Require interest payments reducing outflows leading to negative net cash flow
2. No need to sell assets as they can pay suppliers
3. Avoiding Failure

Question 14

Share Capital - Drawback (4)

Answer 14

1. Requires Dividend payments reducing retained profit levels and investment into (example)
2. This will reduce sales volume and scale.
3. Fixed costs will be spread over less units
4. Making advertising less affordable and reduces brand awareness

Question 15

Overdrafts - Benefit (2)

Answer 15

1. Doesn’t require monthly payments and can be paid off when the business chooses
2. Reducing the Outflows avoiding the negative net cash flow and paying suppliers with no failure

Question 16

Overdraft - Drawback (3)

Answer 16

1. Significant interest payments compared to a loan
2. Increasing the fixed costs when it’s due
3. Operating Loss and less RP into R&D to differentiate

Question 17

Leasing - Benefit (5)

Answer 17

1. Have use of non current assets leading to reduced outflows
2. Improved net cash flow
3. Higher current assets and improved liquidity
4. More attractive and raise more capital to build scale
5. Link to EOS

Question 18

Leasing - Drawback (3)

Answer 18

1. Regular Repayments
2. Increased expenses as the property may be more expensive
3. Reduced Retained Profits to spend on…

Question 19

Trade Credit - Benefit (3)

Answer 19

1. No immediate outflows when buying the product
2. Can use materials to sell to increase inflows
3. Improved net cash flow and…

Question 20

Drawback - Trade Credit (3)

Answer 20

1. Limited amount of time with potential cash problems when payment is due
2. Increased chance of penalties like fines which will increase expenses
3. Therefore Operating loss

Question 21

Grants - Benefit (2)

Answer 21

1. No interest repayments reducing outflows increasing net cash flow
2. Able to keep up with suppliers and avoid failure

Question 22

Grants - Drawback

Answer 22

1. Only used for a specific purpose (example)
2. Limits Capital resulting in
3. Less R&D for Differentiation and becomes price elastic or
4. Unable to increase assets for increased sales volume and can’t benefit from EOS