Unit 3.2 - Sources of Finance

Question 1

Why do businesses require funding?

Answer 1

Businesses require funding for various activities, including starting a business, day-to-day operations, and future growth and expansions

Question 2

Define “Capital (Investment) Expenditure

Answer 2

Money spent to acquire items that will last for more than a year, may be used repeatedly, and generates income.

Question 3

What are examples of items considered as Capital Expenditure?

Answer 3

Machinery, land, buildings, equipment, and vehicles.

Question 4

Define “Revenue Expenditure”.

Answer 4

Money spent on day-to-day operations that need to be covered immediately and controlled to keep the business operational.

Question 5

Provide examples of items considered as Revenue Expenditure

Answer 5

Rent, wages, raw materials, insurance, fuel, and electricity.

Question 6

What is “Personal Funds” as an internal source of finance?

Answer 6

The use of personal money/financing, often used by sole traders or partnerships

Question 7

What is “Retained Profit” as an internal source of finance?

Answer 7

Surplus funds the business keeps after taxes and paying dividends to shareholders.

Question 8

List the advantages of using “Retained Profit” as a source of finance

Answer 8

Cheap (no interest), permanent (doesn’t have to be repaid), flexible, and allows full control without consulting financial institutions.

Question 9

List the disadvantages of using “Retained Profit” as a source of finance.

Answer 9

New businesses may have no retained profits, low retained profits may not be sufficient for expansion, overuse may leave no money for contingency savings, and high retained profits might mean no dividends were paid out.

Question 10

What is “Sales of Assets” as an internal source of finance?

Answer 10

Selling unwanted or unused assets to raise funds.

Question 11

What is “Share (Equity) Capital” as an external source of finance?

Answer 11

Money raised from selling shares via the stock exchange, representing equity owed to shareholders.

Question 12

List the advantages of using “Share (Equity) Capital” as a source of finance.

Answer 12

Doesn’t have to be repaid by the business, and no interest is charged.

Question 13

List the disadvantages of using “Share (Equity) Capital” as a source of finance.

Answer 13

Shareholders expect dividends when profit is made, and ownership and control of the organization are diluted.

Question 14

What is “Loan Capital” as an external source of finance?

Answer 14

Money sourced from financial institutions, with interest charged on the loan.

Question 15

List the advantages of using “Loan Capital” as a source of finance.

Answer 15

Accessible and quick, and interest rates can be negotiable.

Question 16

List the disadvantages of using “Loan Capital” as a source of finance

Answer 16

Must be paid back regardless of the business’ condition, and increases in variable interest rates can result in a high debt repayment burden.

Question 17

What is an “Overdraft” as an external source of finance?

Answer 17

When a lending institution allows a firm to withdraw more money than available in its account, up to a predetermined limit.

Question 18

List the advantages of using “Overdraft” as a source of finance.

Answer 18

Allows the business to spend more than it has and helps in short-term debt issues.

Question 19

List the disadvantages of using “Overdraft” as a source of finance.

Answer 19

Banks can ask for overdraft payments on short notice, and it can have high-interest rates.

Question 20

What is “Trade Credit” as an external source of finance?

Answer 20

An agreement between businesses allowing the buyer to ‘buy now and pay later.’

Question 21

List the advantages of using “Trade Credit” as a source of finance.

Answer 21

Delaying payments allows better cash flow, and it is an interest-free means of raising funds.

Question 22

List the disadvantages of using “Trade Credit” as a source of finance.

Answer 22

Debtors lose out on cash-payment discounts, and delaying payment can sour relations with suppliers.

Question 23

What is “Crowdfunding” as an external source of finance?

Answer 23

Raising small amounts of money from the public to fund a particular business project/venture.

Question 24

List the advantages of using “Crowdfunding” as a source of finance.

Answer 24

Limited risks, avoids dealing with commercial banks, individuals take no controlling interest, and is usually less costly than going public.

Question 25

List the disadvantages of using “Crowdfunding” as a source of finance.

Answer 25

Legal challenges and considerations, investors can ask for additional information, and the risk of theft of intellectual property.

Question 26

What is “Leasing” as an external source of finance?

Answer 26

A contract between a lessor (leasing company) and a lessee (the customer), allowing for the use of an asset without purchasing it.

Question 27

List the advantages of using “Leasing” as a source of finance.

Answer 27

High initial investment not necessary, and not responsible for the repair/maintenance of the asset.

Question 28

List the disadvantages of using “Leasing” as a source of finance.

Answer 28

Can end up being more expensive due to accumulated costs of leasing charges, and cannot be used as collateral.

Question 29

What are “Microfinance Providers” as an external source of finance?

Answer 29

For-profit social enterprises offering financial services to those without a job or on low incomes.

Question 30

List the advantages of using “Microfinance Providers” as a source of finance.

Answer 30

Can help people become financially independent, create benefits for the community, and build a culture of entrepreneurship.

Question 31

List the disadvantages of using “Microfinance Providers” as a source of finance.

Answer 31

Can set very high profit targets, leading to increased equity stake in startups, and may have negative impacts if profit goals aren’t met.

Question 32

What are “Business Angels” as an external source of finance?

Answer 32

Wealthy entrepreneurs investing their own money in high-risk, small to medium-sized businesses with high growth potential.

Question 33

List the advantages of using “Business Angels” as a source of finance

Answer 33

More favorable financial terms, focus on helping a business succeed using extensive business experience and available capital.

Question 34

List the disadvantages of using “Business Angels” as a source of finance

Answer 34

Often ask for a fraction of control or ownership, diluting the ownership of the entrepreneur.

Question 35

How do short-term sources of finance differ from long-term sources of finance?

Answer 35

Short-term sources fund daily operations (revenue expenditure), while long-term sources fund assets over a year (capital expenditure) or business growth in overseas markets.

Question 36

How does the size of the business influence the sources of finance?

Answer 36

Larger businesses have more finance sources available.

Question 37

How does the purpose of funds influence the choice of finance sources?

Answer 37

Trade credits and overdrafts are suitable for short-term needs, while loan capital is for major liquidity issues.

Question 38

How does the amount required influence the choice of finance sources?

Answer 38

Small amounts are suited for short-term sources, while larger amounts are for long-term sources.

Question 39

How does cost influence the choice of finance sources?

Answer 39

Some sources are more costly due to interests and fees.

Question 40

How does the external environment influence the choice of finance sources?

Answer 40

Factors like government and the state of the economy play a role.

Question 41

How does the duration requirement influence the choice of finance sources?

Answer 41

The firm might need collateral or security based on the finance duration.