1.3 Sources Of Business Finance

Question 1

What does short term finance mean?

Answer 1

1. Short term sources of finance are designed to help a business maintain a positive cash flow.
2. Includes arrangements such as trade credit and band overdrafts.

Question 2

What may a business use overdrafts and trade credits for?

Answer 2

1. As an emergency access to finance.

2. Part of their operating model is they know that customers will pay their invoices.

Question 3

What is an overdraft?

Answer 3

A facility offered by a bank that allows an account holder to borrow money at short notice.

Question 4

What is a trade credit?

Answer 4

A credit arrangement that is offered only to business by suppliers.

Question 5

What may the terms and conditions of a credit arrangement likely to include?

Answer 5

1. Credit limit
2. Credit period
3. frequency of payments
4. Method of payments
5. Retrospective discount

Question 6

What does credit limit mean?

Answer 6

The maximum amount of credit that a business has with a financial institution or supplier.

For example, is a business has a credit limit of £1500 with a supplier and owes them £1300. The business can only buy a supply worth £200 before it reaches its credit limit where the business will need to pay in order to buy more supplies.

Question 7

What does credit period mean?

Answer 7

Credit period is the maximum amount of time that a business can take to pay what is owes for a specific month.

For example if credit period has been agreed as 90 days an invoice raised in October will be due to be paid in January.

Question 8

What does Frequency of payment mean?

Answer 8

The frequency with which a business will pay its supplier.

Question 9

What does method of payment mean?

Answer 9

The way in which the business send the money owed to the supplier. A bank transfer is most likely to be preferred method of payment to settle credit accounts.

Question 10

What does retrospective discount mean?

Answer 10

A discount applied when the business has purchased a certain number of goods or spent a certain amount of money with a supplier.

Question 11

What is a long term source of finance?

Answer 11

A long term source of finance is one that is designed to be paid back over a much longer period of time than a short term source of finance.

Question 12

What may a long term source of finance include?

Answer 12

1. Personal savings
2. Venture capital
3. Share capital
4. Loans
5. Retained profit
6. Crowdfunding.

Question 13

What does personal savings mean?

Answer 13

Personal savings refers to any money that the entrepreneur has saved up either before starting the business or while they are running the business.

Question 14

What does venture capital mean?

Answer 14

Money lent by a large business or successful entrepreneur to small start up business.

Question 15

What does share capital mean?

Answer 15

The amount of money invested in a business by shareholders is called share capital.

Question 16

What does loans mean?

Answer 16

A loan is an amount of money lent to an individual or a business that will be paid off with interest over an agreed period of time.

Question 17

What may a bank do when giving a loan?

Answer 17

1. Credit checks.

This means look at whether or not they have paid back any previous loans that they have taken out and made credit payments in time.

The bank may also demand security from the business in the form of the business assets.

If the business is unable to replay the loan the bank can then order to sell those assest in order to settle the loan.

If the business is new the bank may ask for a guarantor which is a person who will guarantee to pay the monthly repayments.

Question 18

What does retained profit mean?

Answer 18

The profit reinvested back into the business.

Money that a business keeps rather than paying out to its shareholders.

Question 19

What does crowdfunding mean?

Answer 19

Crowdfunding means that a business obtains funding from a large number of people who each may a small amount of money.

Question 20

Explain one reason why a mushiness may set up a credit agreement with a supplier.

Answer 20

To allow a business to have an financial support with their supplier. For example a business may agree to a credit period allowing the business to pay the supplier in given periods of time,