topic 26 - sources of finance

Question 1

owners personal finance

Answer 1

includes personal savings and money borrowed from family and friends.

Question 2

retained profits

Answer 2

a business holding back profits from previous years.

Question 3

sale of assets

Answer 3

selling something that the business no longer needs.

Question 4

sell and lease back

Answer 4

selling an asset and leasing (renting) it back.

Question 5

share issue

Answer 5

selling shares in the business. PLCs sell on the stock market, Ltds sell shares privately.

Question 6

debentures

Answer 6

loans given to the business by individuals.

Question 7

bank overdraft

Answer 7

a facility which allows a business to spend more than is in its bank account.

Question 8

trade credit

Answer 8

allows a business to buy goods from suppliers and pay for them at a later date.

Question 9

debt factoring

Answer 9

a business sells its unpaid customer invoices to a factoring company. the factoring company then collects and keeps the customers debts.

Question 10

grants

Answer 10

money is given to a business from central or local government, the EU or the Prince’s Trust.

Question 11

bank loan

Answer 11

a bank agrees to lend a business money for a specific purpose, for a fixed period of time. regular repayment instalments are put in place.

Question 12

hire purchase

Answer 12

a business can buy an asset by paying an initial deposit and then monthly payments for a fixed period of time.

Question 13

mortgage

Answer 13

a large sum of money borrowed from a bank or building society secured on a property.

Question 14

venture capitalists

Answer 14

organisations that invest in established businesses in return for equity (ownership percentage).

Question 15

crowd-funding

Answer 15

small amounts of money from a large number of people are raised to fund a new business or a project. this is typically done via the internet, e.g. Kickstarter.

Question 16

advantages of owners personal finance

Answer 16

• this allows the owner to keep control of the business.
• i can reduce the amount to be borrowed from other sources

Question 17

disadvantages of owners personal finance

Answer 17

• it can be difficult to withdraw savings once they are invested in the business.
• there is a risk that the owner could lose their savings if the business fails.

Question 18

advantages of retained profits

Answer 18

• this can be used to make larger purchases, such as assets or for bulk buying.
• the business doesn’t go into debt.

Question 19

disadvantages of retained profits

Answer 19

• a business can find it more difficult grow if it uses retained profits, especially to solve short-term cash-flow problems.

Question 20

advantages of sale of asset

Answer 20

• money can be raised from the sale of an asset to boost cash flow.
• the money does not need to be repaid.

Question 21

disadvantages of sale of asset

Answer 21

• if the finance is required urgently, the business may have to sell the asset for less than it is worth.

Question 22

advantages of sell and lease back

Answer 22

• the use of the asset is retained, which might be essential to the business, e.g. selling and leasing back the main shop/factory/office.
• the business passes over responsibility for maintaining and renewing equipment to the leasing company.

Question 23

disadvantages of sell and lease back

Answer 23

• leasing over a long period of time can be expensive - ultimately, the business may pay back more than it recieved from the sale.

Question 24

advantages of share issue

Answer 24

• very large sums of money can be raised through the sale of shares.
• the money does not need to be repaid.

Question 25

disadvantages of share issue

Answer 25

- dividends have to be paid to shareholders - it can be expensive to advertise and organise the sale of shares.

Question 26

advantages of debentures

Answer 26

- control of the business is retained - these can be paid back over a long time.

Question 27

disadvantages of debentures

Answer 27

- interest must be paid annually, even if a loss is made, unlike with shares where dividends are only paid out when a profit is made.

Question 28

advantages of a bank overdraft

Answer 28

- this is usually easy for a business to arrange with its bank. - it allows a buisness to continue to pay business expenses, despite there being no money in its bank account.

Question 29

disadvantages of a bank overdraft

Answer 29

- high interest rates are usually applied by the bank for borrowing money in this way. - the overdraft can be withdrawn by the bank at anytime and must then be repaid.

Question 30

advantages of trade credit

Answer 30

- this allows a business to sell goods at a higher price and earn a profit before the bill needs to be paid. - it helps a business to keep going when cash flow is poor.

Question 31

disadvantages of trade credit

Answer 31

- discount for prompt payment is lost. - suppliers will be reluctant to continue to offer credit if a business does not pay within the agreed credit period.

Question 32

advantages of debt factoring

Answer 32

- responsibility for collecting the debt is passed on to the factor, saving the company time and effort. - cash flow is improved by receiving an advanced payment of the debts from the factor.

Question 33

disadvantages of debt factoring

Answer 33

- the business has to sell the customer debt for a reduced amount, i.e. it receives less money than is actually owed. - factoring companies are usually only interested in large amounts of debt.

Question 34

advantages of grants

Answer 34

- these are often offered as an incentive and a way of helping a business get started or expand. - they money does not need to be repaid.

Question 35

disadvantages of grants

Answer 35

- they can be complicated to apply for and can require the business to meet certain requirements. - grants are usually one-off payments that are not repeated.

Question 36

advantages of a bank loan

Answer 36

- the business can budget for the repayments - purchases of essential equipment can be made in advance and paid back over a number of years.

Question 37

disadvantages of a bank loan

Answer 37

- interest has to be repaid along with the loan amount. - small businesses may find it more difficult to secure a loan and often need to pay higher interest rates, as they are a greater risk.

Question 38

advantages of hire purchase

Answer 38

- expensive equipment can be bought with only an initial deposit. - the asset, e.g. a delivery van, is owned by the business at the end of the repayments for a fixed period of time.

Question 39

disadvantgaes of a hire purchase

Answer 39

- the business does not own the asset until the last instalment is paid. - it can be an expensive form of borrowing if interest rates are high.

Question 40

advantages of mortgage

Answer 40

- it can be paid back over a long period of time, e.g. 25 years. - the interest rate charged is often lower than the rate on a bank loan.

Question 41

disadvantages of a mortage

Answer 41

- interest has to be repaid along with the loan amount. - the mortgage provider owns the property until the last repayment is made. this means the business could lose the property if it does not keep up the repayments.

Question 42

advantages of venture capitalists

Answer 42

- large amounts of investment can be gained. - venture capitalists are willing to take on more risky investments than banks.

Question 43

disadvantages of venture capitalists

Answer 43

- venture capitalists have an equity stake, which means control and a share of profits are given up.

Question 44

advantages of crowd funding

Answer 44

- finance can be raised from individuals when banks see a venture as too risky. - some funds are donated, so there is nothing to repay.

Question 45

disadvantages of crowd funding

Answer 45

- there is low success rate. only a small percentage of crowd funding ventures get off the ground, often because they have not reached their target amount. - privacy can be a problem as ideas become public and can therefore be copied.

Question 46

describe short-term finance required

Answer 46

an organisation may only need finance for a short term, perhaps to cover a cash-flow problem, so an overdraft could be used.

Question 47

describe long-term finance required

Answer 47

an organisation may need long-term finance, perhaps to fund the purchase of property, so would choose a mortgage.

Question 48

describe interest rates

Answer 48

an organisation will choose the finance with the lowest interest rate available. often a hire purchase agreement will have a lower interest rate than a bank loan so would be selected to keep the cost of the finance as low as possible.

Question 49

describe payback term

Answer 49

the quicker the payback term, the less interest the organisation will pay on borrowing.

Question 50

describe size and type of organisation

Answer 50

organisations are restricted to certain sources of finance, for example, a public sector organisation cannot sell shares and has to rely on government funding.