107 business finance

Question 1

what is retained profit

Answer 1

• this is money that is kept from previous years profits rather than reinvested
• this will provide an liquidity buffer(flow of cash that comes in and out) and potential funds for growth

Question 2

what is working captital

Answer 2

this is the money used to pay all of a business’ short term expenses (paid within a year ). working capital is used to buy stock and cover day-to-day costs .

Question 3

how can working capital finance be obtained

Answer 3

-by reducing their trade credit period (arrangement to buy good/services without making immediate cash or cheque payments) , they can collect debts more efficiently, and recheck money from customers more quickly
-reducing stock holdings is another way to release finance

Question 4

what is sale of assets

Answer 4

-this is when an established or large business sells assets that are no longer requires eg.buildings/machinery
-they can reinvest this money by buying better assets or for advertising

Question 5

what is a bank loan

Answer 5

-a bank loan is money lent to a business by the bank which is repaid over a set period of time (perhaps 3-5 years ), with interest ( the price you pay to borrow money)
-the interest rate is fixed- business knows ahead of time what it’s interest costs will be and his much it needs to pay back each month
-security , if available, will be in the form of property , offering security makes it easier to get funding and reduces interest rates charged

Question 6

what is trade credit

Answer 6

• this is an interest free way to raise finance
• businesses buy items such as fuel and raw materials and pay for them at a later date . the credit period is usually between 30-90 days

Question 7

what is debt factoring

Answer 7

-business sells invoices (money customers owe) to another company ‘factor’
-the facto then collects the full money from the customer
-once the customer pays , the business gets the remaining money, but the factor keeps a small fee for their service
-they do this to gain access to cash right away rather than waiting at least 28 days to be paid the full amount, helping business stay liquid

Question 8

what is an overdraft

Answer 8

it is the facility to withdraw more from an account than is in the bank account , resulting in a negative balance. business often depend upon authorised overdrafts to provide a working capital.

Question 9

what is commercial mortgages

Answer 9

• commercial mortgage- property used as security against loan/ can be as much as 60 or 70% of the value of the property.
• because security is being offered, interest rates will be lower . payments are made monthly for the term of the mortgage.
• failure to make repayments will lead to the property being repossessed

Question 10

what is share capital

Answer 10

• is the money that a company gets from people who buy shares in it
• when you buy a share, you’re giving the company money, and in return, a small ownership of the company
• the money raised by selling shares helps the company pay for things eg. equipment, expanding
• long term finance- does not need to be paid back

Question 11

what is venture capatalist

Answer 11

-they are professional investors who can invest large amounts of capital into small-medium sized business (growing businesses).
-they will not only take a shareholding , but expect to be fully involved in running the business
-they will appoint managers and advisors to help generate success and skills , allowing the business to grow at a speed that was previously impossible

Question 12

what is government assistance

Answer 12

this is money provided by the government to support a business

Question 13

what is hire purchase

Answer 13

• a method of gaining the use of capital goods whist paying a monthly fee
• hire purchase is where a business acquires an asset by paying a hire charge and a payment towards the purchase over a period of time . at the end of the hire purchase period the business will own the asset

Question 14

what is leasing

Answer 14

a method of gaining the use of capital goods whilst paying a monthly fee. leasing is similar to renting equipment eg. photocopiers. the business pays a regular amount for a period of time , but the item belongs to the leasing company

Question 15

what is sale and leaseback

Answer 15

involves the business selling assets to a finance company and then leasing the asset back. this method of raising finance means that the capital that is produced can be reinvesting into growing small-medium sized businesses.

Question 16

(+) & (-) of retained profit

Answer 16

(+) this is the cheapest source of finance because it is money that belongs to the business and no interest will be charged

(-) short term pressures to pay profits such as paying dividends to shareholders and owners , restricts availability of this form of finance

Question 17

(+) & (-) of working capital

Answer 17

(+) free and can gain instant access

(-) likely to drive customers away and have an opposite affect of making finance available. reducing stock holdings releases finance but a sudden surge in demand can result in lost sales if the business is unable to meet delivery dates

Question 18

(+) & (-) of sale of assets

Answer 18

(+) free up cash invested in assets no longer used

(-) smaller business unlikely to have unwanted assets and , if growth is an objective, they’re more likely to want to acquire assets rather than loosing them.

Question 19

(+) & (-) of bank loan

Answer 19

(+) can spread costs over a fixed term and make manageable payments

(-) security in the form of property -risky-if the business owner is not able to maintain payments, homes can be lost/ business assets removed , interest must be paid, requires bank approval

Question 20

(+) & (-) of trade credit

Answer 20

(+) interest free, credit period allows payments to be delayed until after the business converts raw materials into goods and sells them - so they can afford the payment

(-) many suppliers offer discounts for early payment , so delaying payment- higher costs , and a poor relationship with suppliers- hard to access stock in the future

Question 21

(+) & (-) of debt factoring

Answer 21

(+) improves cash flow by receiving capital instantly

(-) the business will not revive the full value of the invoice-the factoring company takes a share of the money owed by customers

Question 22

(+) & (-) of overdrafts

Answer 22

(+) quick and easy to arrange , can use it to fix cash flow problems

(-) overdrafts can be withdrawn from a bank with just 30 days notice- relying on an overdraft for day-to-day funds may find that with a withdrawal of the overdraft facility-they won’t have enough money for paying bills ,wages ext

Question 23

(+) & (-) of commercial mortgages

Answer 23

(+) the expenditure is easily managed- repayments are made over a long period of time (25+ years)

(-) higher costs- interest charged -if repayments are missed , the property can be taken from the business

Question 24

(+) & (-) of share capital

Answer 24

(+) a form of permanent capital- it doesn’t need to be paid back , since shareholders cannot get a refund on their shares , if they wish to sell them , they must find someone else to tell them to,so shares are constantly sold , and can gain large sums of money

(-) bringing in shareholders can cause a loss of control and slow decision making , there has to be enough interest

Question 25

(+) & (-) of venture capitalists

Answer 25

(+) large sums of money provided, the investor is experienced in business- give advice/support

(-) owner loses some control over the business

Question 26

(+) & (-) of government assistance

Answer 26

(+) free and sometimes doesn’t need paying back

(-) qualifying criteria is narrow

Question 27

(+) & (-) of hire purchase

Answer 27

(+) costs are spread and flexible (1-5 years)

(-) if the instalments are not paid, the asset can be taken from the business

Question 28

(+) & (-) of leasing

Answer 28

(+) cheaper in the short run than buying a piece of equipment outright

(-) more expensive in the long term because the leasing company charges fees that makes the total cost greater than the original cost

Question 29

(+) & (-) of sale and leaseback

Answer 29

(+) only pay for the machines use

(-) bad for cash flow as it has an extra monthly expense

Question 30

evaluate different sources of finance available to entrepreneurs and SMEs

Answer 30

questions to help evaluate which method is best:
do you have retained profits?
do you want to pay it back ?
what is the current interest rate?
do you want to retain control?
do you need guidance and business support?
how stable is the economy/ market?
how long do you need the finance?
what is the finance for?
are you eligible for the finance?