Sources of Finance (Advantages and Disadvantages)

Question 1

What are the internal sources of finance

Answer 1

Retained Profit, Net Current Assets, Sale Of Assets

Question 2

What are the external sources of finance

Answer 2

Owners Capital, Loans, Crowdfunding, Mortgages, Venture Capital, Share Capital

Question 3

What is retained profit

Answer 3

Profit kept within the business from the year

Question 4

Is retained profit a short term or long term source of finance

Answer 4

Short term

Question 5

What are the advantages of retained profit

Answer 5

Avoids interest repayments.
Does not dilute business ownership.

Question 6

What are the disadvantages of retained profit

Answer 6

Only viable of profit is within the business.
May cause the shareholders dissatisfaction if this is at the expense of dividends

Question 7

What are net current assets

Answer 7

The sum of all assets which are not intended for use on a continuing basis in the firm’s business (12 months)

Question 8

What are the advantages of net current assets

Answer 8

No interest payments or loss of ownership.

Question 9

What are the disadvantages of net current assets

Answer 9

This may lower prof ability if discounts are lost from early payments

Question 10

What is the equation for net current assets

Answer 10

Current Assets - Current Liabilities

Question 11

What are current liabilities

Answer 11

Current liabilities are a company’s short-term financial obligations that are due within one year or within a normal operating cycle

Question 12

What are trade receivables

Answer 12

The amount owed to the business by its customers following the sale of products

Question 13

What are trade payables

Answer 13

The amount the business owes by their suppliers following the sale of products and raw materials

Question 14

What is sale of assets

Answer 14

Referring to the sale of long term fixed assets

Question 15

Is the sale of assets a short or long term source of finance

Answer 15

Short term

Question 16

What are the advantages of sale of assets

Answer 16

No interest charges.

May be turning an obsolete asset in finance.

Question 17

What are the disadvantages of sale of assets

Answer 17

The seller is subject to a double layer of taxation.
Transferring assets may be more complicated.
Agreements tied to certain assets may need to be renegotiated.

Question 18

What is owners capital

Answer 18

This is the amount that the owner has invested into the business

Question 19

Is owners capital a long term or short term source of finance

Answer 19

Usually short term however may be long term to smaller businesses

Question 20

What are the advantages of owners capital

Answer 20

There are no interest payments needed for using owners capital.

Does not require borrowing money to fund.

The owner has full control over the finance applied.

Question 21

What are the disadvantages of owners capital

Answer 21

The income needed for the business may also be needed for personal use

May have some physiological effects applied.

Savings will be lost if the business does not peform

Question 22

What are loans

Answer 22

A loan is a sum of money that is borrowed from a lender, with the agreement to repay it plus interest, usually in installments, over a set period of time

Question 23

What are the different types of loans

Answer 23

Fixed, Variable, Secured, Personal

Question 24

What are the advantages of loans

Answer 24

Loans can help you spread the cost of a large purchase over a longer period of time, making it more affordable.

The interest and principal payments on debt can be deducted from your business income taxes.

You can spread out your loan payments over a longer period of time, making them more affordable each month.

Question 25

What are the disadvantages of loans

Answer 25

The applied interest payments may be hefty for the business to pay back. Some lenders require collateral to be applied. The sign-up are usually quite time consuming

Question 26

Are loans a short term or long term source of finance

Answer 26

Usually a long term of source of finance

Question 27

What is crowdfunding

Answer 27

the practice of funding a project or venture by raising money from a large number of people who each contribute a relatively small amount, typically via the internet

Question 28

What are the advantages of crowdfunding

Answer 28

A fast way to raise finance with no upfront costs. May cause increased brand exposure.

Question 29

What are the disadvantages of crowdfunding

Answer 29

Must have a reasonable cause in order to crowdfund. Must build up considerable interest into the crowdfunding project.

Question 30

Is crowdfunding a short term or long term source of finance

Answer 30

Short term source of finance

Question 31

What is venture capital

Answer 31

Venture capital is money invested in a business, usually a start-up.

Question 32

When is venture capital usually used

Answer 32

It is typically provided by investors who expect to receive a high return on their investment. It is also used when a business is thought to have high potential for growth

Question 33

What are the advantages of venture capital

Answer 33

Aside from the financial backing, obtaining venture capital financing can provide a start-up or young business with a valuable source of guidance and consultation. Venture capital allows connections to be created with esteemed businesses.

Question 34

What are the disadvantages of venture capital

Answer 34

The business owner may lose control due to investors wanting to be heavily involved.

Question 35

Is venture capital a short or long term source of finance

Answer 35

Long term source of finance

Question 36

What are mortgages

Answer 36

These are long term loans normally spanning around twenty five years which is secured against a certain asset. Interest is applied on the mortgage

Question 37

What are the advantages of mortgages

Answer 37

Large amounts of finance can be raised. Paid over a prolonged period of time. Ownership or control of the business is not lost.

Question 38

What are the disadvantages of mortgages

Answer 38

Interest is applied on the amount borrowed. Interest rates can fluctuate. Interest has to be made no matter if profit is made or not

Question 39

Is mortgages a long term or short term source of finance

Answer 39

Long term source of finance

Question 40

What is debt factoring

Answer 40

This is essentially selling the businesses debts to a third party in order to receive cash at a fast rate. The factoring company pays a percentage and receives a right to collect the debts

Question 41

What are the advantages of debt factoring

Answer 41

Speeds up the cash flow of the business. The factor company takes the risk of bad debt.

Question 42

What are the disadvantages of debt factoring

Answer 42

Only a certain of percentage of the amount owed to the initial company is given which reduces profits. May give customers the wrong impression and may alienate them.

Question 43

When would debt factoring usually be used

Answer 43

Used when the business does not have the facilities or the time to chase up the debts. Business may need income at a fast rate.

Question 44

Is debt factoring a short term or long term source of finance

Answer 44

Short term source of finance