Unit 3.1

Question 1

Start-up capital

Answer 1

Capital needed by an entrepreneur to set up a business

Question 2

Working capital

Answer 2

The capital needed to pay for raw materials, day-to-day running costs, and credit offered to customers. In accounting terms: working capital = current assets - current liabilities

Question 3

Internal finance

Answer 3

Raised from the business’s own assets or from profits left in the business (ploughed-back or retained profits)

Question 4

External finance

Answer 4

Raised from sources outside the business

Question 5

Retained profit

Answer 5

The profit left after all deductions, including dividends, have been made; this is ‘ploughed back’ into the company as a source of finance

Question 6

Liquidity

Answer 6

The ability of a firm to pay its short-term debts

Question 7

Overdraft

Answer 7

Bank agrees to a business borrowing up to an agreed limit as and when required

Question 8

Debt-factoring

Answer 8

Selling of claims over debtors to a debt factor in exchange for immediate liquidity; only a proportion of the value of the debts will be received as cash

Question 9

Hire purchase

Answer 9

An asset is sold to a company which agrees to make fixed repayments over an agreed time period; the asset belongs to the company

Question 10

Leasing

Answer 10

Obtaining the use of equipment or vehicles and paying a rental or leasing charge over a fixed period. This avoids the need for the business to raise long-term capital to buy the asset; ownership remains with the leasing company

Question 11

Equity finance

Answer 11

Permanent finance raised by companies through the sale of shares

Question 12

Long-term loans

Answer 12

Loans that do not have to be repaid for at least one year

Question 13

Debentures or long-term bonds

Answer 13

bonds issued by companies to raise debt finance, often with a fixed rate of interest

Question 14

Rights issue

Answer 14

Existing shareholders are given the right to buy additional shares at a discounted price

Question 14

Venture capital

Answer 14

Risk capital invested in business start-ups or expanding small businesses, which have good profit potential, but do not find it easy to gain finance from other souces

Question 15

Business angels

Answer 15

Individual investors who put in their own money in a variety of businesses and are seeking a better return than they would obtain from conventional investments

Question 16

Subsidies

Answer 16

Financial benefits given by the government to a business to reduce costs and encourage increased production

Question 17

Microfinance

Answer 17

The provision of very small loans by specialist finance businesses, usually not traditional commercial banks