sources of finance

Question 1

what are the 6 sources of finance

Answer 1

debt factoring 
overdraft 
retained profit 
share capital 
loans
venture capital

Question 2

what is debt factoring

Answer 2

the process of selling debts to a financial institution

Question 3

when a business uses debt factoring - how much of the debt do they typically receive instantly

Answer 3

80%

Question 4

when a business uses debt factoring the bank will retain what percentage of the debt as a fee

Answer 4

4 - 10%

Question 5

is debt factoring an internal or external source of finance

Answer 5

external

Question 6

is debt factoring a long or short term source of finance

Answer 6

short term source of finance

Question 7

what are the advantages of debt factoring

Answer 7

receive a large amount of debt immediately
good source of short-term finance to reduce cash flow problems
debts are chased by experts (saves managers time)
reduces risk of bad debt

Question 8

what are the disadvantages of debt factoring

Answer 8

Reduces profitability of the firm as a result of the fee paid to the financial institution
May damage reputation of the firm as they are seen to need short-term finance

Question 9

what is an overdraft

Answer 9

An overdraft is the facility on a current account (bank account) up to an agreed sum which is more than what is in the account

Question 10

what happens to a bank account when its in an overdraft

Answer 10

it goes red

Question 11

how is the interest charged on a overdraft

Answer 11

it is only charged to the overdrawn amount

Question 12

is an overdraft an internal or external source of finance

Answer 12

external

Question 13

is an overdraft a long or short term source of finance

Answer 13

short term

Question 14

what are the advantages of an overdraft

Answer 14

Only borrowed when it is required meaning it is very flexible 
Only pay for money borrowed
Quick and easy to arrange 
No charges for paying of the overdraft
Security is usually not required

Question 15

what are the disadvantages of an overdraft

Answer 15

The bank can ‘call it in’ (demand repayment) at any time
The business must pay interest
Interest payments can be variable making it more difficult to budget
Only relatively small amount of money
Makes the business seem as though they have cash flow problems to public

Question 16

what is retained profit

Answer 16

profit kept in the business from revenue to help finance future activities

Question 17

is retained profit and internal or external source of finance

Answer 17

internal

Question 18

is retained profit an short or long term source of finance

Answer 18

short term

Question 19

what are the advantages of retained profit

Answer 19

avoids interest payments

does not dilute the business ownership

Question 20

what are the disadvantages of retained profit

Answer 20

Only an option is sufficient retained profit exists within the business
May cause shareholder dissatisfaction if this is at the expense of dividend payments
Reduces the security of keeping retained profits for unseen situations or to take advantage of new opportunities (an opportunity cost)
No more safety net for is something goes wrong with the business

Question 21

what is share capital

Answer 21

finance raised from the sale of shares

Question 22

what is share capital a form of

Answer 22

equity capital

Question 23

how are shareholders rewarded for their investment

Answer 23

the payment of dividends (may also benefit from increased share price)

Question 24

is share capital an external or internal source of finance

Answer 24

external

Question 25

is share capital a long or short term source of finance

Answer 25

long term source of finance

Question 26

what are the advantages of share capital

Answer 26

Only need to pay dividends if a profit is being made and the amount of the dividend is not fixed Possible to raise large amounts of finance No interest repayments

Question 27

what are the disadvantages of share capital

Answer 27

Partial loss of ownership as shareholders are part owners Potential risk of loss of control for a PLC with a threat of hostile takeovers Complex and costly process for issuing shares, especially for a PLC

Question 28

what is a loan

Answer 28

a set amount of money to provide for a specific purpose, to be repaid with interest over a set period

Question 29

what is a loan secured against

Answer 29

assets [collateral]

Question 30

what is collateral

Answer 30

an asset which is used for security for a loan

Question 31

why do interest rates vary

Answer 31

how risky the bank regards the loan to be

Question 32

what are the advantages of loans

Answer 32

Quick and easy to arrange Fixed interest rates allow firms to budget Improved cash flow The borrower retains ownership of the company

Question 33

what are the disadvantages of loans

Answer 33

Interest must be paid regardless of financial performance in the business A firm that is highly geared may be high risk – banks will be reluctant to make further loans and investors may be reluctant to buy shares A firm normally provides security known as collateral. The asset which is the collateral and will get taken if it isn’t paid back

Question 34

what is venture capital

Answer 34

An investment from an individual or merchant bank or other organisation into another business in return for a % of the equity in the business

Question 35

is venture capital an external or internal source of finance

Answer 35

external

Question 36

is venture capital a long or short term source of finance

Answer 36

long term

Question 37

what are the advantages of venture capital

Answer 37

Potential for large sums of money for investment Expertise to help start the business Makes it easier to attract other sources of finance (once they see the business has a venture capitalist

Question 38

what are the disadvantages of venture capital

Answer 38

Partial loss of ownership Risk on conflict or perceived interference by the dragon / investor A long and complex process Expert financial projects are likely to be required to persuade the investor to invest