119 business finance

Question 1

what is an internal source of finance

Answer 1

refers to money that comes from within a business eg. retained profit , sale of assets, working capital

Question 2

what is an external source of finance

Answer 2

refers to money that comes from outside a business eg. family and friends , bank loans and overdrafts, venture capitalists, trade credit , commercial mortgage, share capital and government grants

Question 3

what is sales of assets (i)

Answer 3

-this is when an established or large business sells assets that are no longer requires,such as buildings or machinery. the business can then reinvest this money by buying new bigger assets or paying for advertising campaigns

Question 4

what is owner’s capital (i)

Answer 4

for small business, further investment of the sole trader’s or partner’s own capital (savings) may be the only method to raising money. risk taking entrepreneurs may sell their own assets eg.house to raise money to invest

Question 5

what is reinvested profit (i)

Answer 5

this is money that is kept from previous years profits rather than given to the owners of the shareholders. this will provide an liquidity buffer(flow of cash that comes in out) and potential funds for growth

Question 6

what is an overdraft (e)

Answer 6

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. they change interest on the amount withdrawn , and will only allow an overdraft if they believe the business is credit worthy (capable if paying the money back) - interest rates are high

Question 7

what is a bank loan (e)

Answer 7

this is lending by a bank to a business. a fixed amount is lent for a fixed period of time and normally for a specific purpose. Interest is changed on the loan, plus part of the capital (the amount borrowed), will have to be paid back each month. The bank will only lend if the business is creditworthy, and it may require security. If security is required, this means the loan is secured against an asset of the borrower. If the loan is not repaid, then the bank can take possession of the asset and sell the asset to get its money back

Question 8

what is trade credit (e)

Answer 8

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 , this allows the business to sell their products ensuring they have enough money to pay supplier back , delaying payments can ruin relationship with suppliers

Question 9

what is leasing assets (e)

Answer 9

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

Question 10

what is hire purchase (e)

Answer 10

similar to leasing but at the end of the hire period the asset belonged to the business that hires it -> 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.

Question 11

what is a venture capitalist(e)

Answer 11

-they are professional investors who can invest large amounts of capital into growing businesses. venture capitalists will not only take a shareholding, they will 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
-they expect quick growth and potentially large profits

Question 12

what is debt factoring (e)

Answer 12

-a method of turning invoices into cash, (an invoice is a document that is used to record the sakes of goods and services from one party to another). banks and other financial organisations offer factoring services ,which pay a proportion of the value of an invoice (80-85%) when the invoice is issued. the balance, minus the fee, is paid to the business when the invoice is paid.
-they do this to gain access to cash right away rather than waiting at least 28 days to get the full amount

Question 13

(+)/(-) of sales of assets

Answer 13

(+) create more space for profitable uses , free up cash invested in assets no longer used
(-) might need the assets in the future, or not be able to sell them

Question 14

(+)/(-) of owners capital

Answer 14

(+) doesn’t require borrowing money , no interest to paid
(-) owner may not have enough savings or need cash for personal use

Question 15

(+)/(-) of reinvested profit

Answer 15

(+) easy access to the money , no interest needs to be paid
(-) once the money is gone its not available for any unforeseen problems the business might face

Question 16

(+)(-) of overdrafts

Answer 16

(+) quick access , can use it to fix cash flow problems, allows emergency purchases
(-) high interest rates , short term solution- needs to be repaid quickly

Question 17

(+)/(-) of bank loan

Answer 17

(+) easy and quick to access , can get a significant amount of money , costs spread costs over a fixed term and make manageable payments
(-) pay interest, hard for new business , security in the form of assets

Question 18

(+)/(-) of trade credit

Answer 18

(+) access to suppers without immediate payment , no interest ,
(-) short term , must be paid back quickly, usually small amounts

Question 19

(+)/(-) of leasing assets

Answer 19

(+) no large upfront payments - cheaper in the short term
(-) more expensive in the long term because the leasing company charges fees that makes the total cost greater than the original cost, assets aren’t owned by the business

Question 20

(+)/(-) of hire purchase

Answer 20

(+) expensive assets can be purchased and paid back over a long period of time (1-5 years)
(-) interest is changed in hire purchase items, equipment is not owned by the business until the final payment is made

Question 21

(+)/(-) of venture capalists

Answer 21

(+) can potentially raise huge amounts of money , they offer advice and help maximising profit
(-) owner must give away part of the business , they may have different visions for the business

Question 22

(+)/(-) of debt factoring

Answer 22

(+) good way of raising cash quickly if the business has a cash flow problem
(-) not good for profits since it reduces the total revenue received from those sales

Question 23

finance for sole traders

Answer 23

for sole traders taking on a partner is a good way of helping fund investment, as they bring more capital (money) for investment, offer new skills which help a business grow. new partners ‘buy in’ and will be part ownership of the business

Question 24

finance for LTDs

Answer 24

a LTD a share issue share issue can help fund large investment- this is the offering for sale of new shares in a business. for largest business eg.vodafone , there are billions of shares in issue - some shareholders owning hundreds of shares , and other big investors allowing millions to be raised. which can be used for investment into the business and expansion into new ventures

Question 25

advantages/disadvantages of internal sources

Answer 25

(+) the money belongs to the business and no repayments are required or interest charged
(-) the amount of capital available to a business is often limited, or that the funds are insufficient to pay for what the business requires