Unit - Finance - Sources Of Finance

Question 1

What are overdrafts?

Answer 1

Overdrafts are where a bank lets a business have a negative amount in its bank account

Question 2

What is some advantages of overdrafts?

Answer 2

They are easy to arrange and flexible and they only pay interest on the amount of the overdraft they actually use

Question 3

What are disadvantages of overdrafts?

Answer 3

-bank charge high rates of interest on them
-there may also be a fixed charge for using an overdraft so they are unsuitable for long term

Question 4

What is debt factoring?

Answer 4

When banks / other financial institutions take unpaid invoices off the hands of the business, and give them and instant cash payment

Question 5

What are advantages of debt factoring?

Answer 5

The business can instantly get money they are owed

Question 6

What is an disadvantage of debt factoring?

Answer 6

The debt factoring company keeps some of the money owed as a fee

Question 7

What is a bank loan?

Answer 7

Businesses can borrow a fixed amount of money and pay it back over a fixed period of time with interest

Question 8

What is some advantages of a bank loan?

Answer 8

• you are guaranteed the money for the duration of the loan, you only have to pay back the loan and interest
  -also interest charges for a loan tend to be lower than an overdraft

Question 9

What are some disadvantages for a bank loan?

Answer 9

-can be difficult to arrange
-keeping up with repayments can be difficult if cash flow is bad
-businesses might have to pay a charge if they decide to pay back the loan early

Question 10

What is share capital?

Answer 10

Limited companies can raise money by selling shares in a company

Question 11

What is an advantage of a share capital?

Answer 11

• The money doesn’t have to be paid back
• new shareholders can bring additional expertise into a business

Question 12

What is a disadvantage of share capital?

Answer 12

• The owners no longer own all of the business
• have to pay shareholders a dividend and give them a say on how the business is run

Question 13

What is crowd funding?

Answer 13

A method of financing a business or project using contributions made by a large number of people

Question 14

What is a venture capital?

Answer 14

Funding in the form of share or loan capital that is invested in a business that is thought to be high risk

Question 15

What are venture capitalists? Give Example.

Answer 15

Professional investors who invest in businesses they think have potential to be successful. They may also provide business advice, but applying for funding is a long process. Example = dragons den ppl

Question 16

What is an internal source of finance?

Answer 16

Money that comes from within a business

Question 17

What is the 4 examples of internal sources of finance?

Answer 17

-selling assets
-retained profits
-reduce working capital
-personal savings

Question 18

What is an external source of finance?

Answer 18

Money that comes from outside a business

Question 19

What are 4 examples of external sources of finance?

Answer 19

-Business loans
-Equity Investments
-Crowdfunding
-Government grants/schemes

Question 20

What are equity investments?

Answer 20

Money that is invested in a company by purchasing shares of that company in the stock market

Question 21

What are some advantages and a disadvantage or equity investments?

Answer 21

Advantage - Higher returns, limited liability, dividends, ownership of part of business
Disadvantage - company owners must give up a portion of their ownership and dilute their control

Question 22

What are government grants/schemes?

Answer 22

Transfer of funds to Individuals, businesses or other parts of the governmentnwith the expectation that they will be used to further a policy objective or promote public good

Question 23

What are the disadvantages and advantage of a government grant?

Answer 23

Advantage - does not need to be paid back
Disadvantage- time consuming to apply for grants, business needs to meet certain criteria

Question 24

What are disadvantages and advantages of crowdfunding?

Answer 24

Advantage - fast way to raise finance, access to large amount of investors
Disadvantage - public requests can risk your project being copied by competitors, if target is not reach money is returned and business gets nothing

Question 25

What are the disadvantages and advantages of using retained profits?

Answer 25

Advantage - does not need to be repaid Disadvantage- for profits to build this could take too long and good business opportunities could be missed

Question 26

What are the disadvantages and advantages of using personal savings?

Answer 26

Advantage - no debt repayments, remaining control, quick + convenient Disadvantage- more pressure, financial loss, owner may not have enough savings

Question 27

What does reducing capital mean?

Answer 27

Allows a company to reduce its issued capital without the need for individual shareholder’s consent. Can reduce amount paid to shareholders or cancelling shares, decreasing stock of company

Question 28

What are advantages and disadvantages of reducing capital?

Answer 28

Advantage - more efficient operations, more funds for business for things like innovation Disadvantage - impact on future growth, negative impact on share price