1.3.4 - Sources of Business Finance

Question 1

What are the 2 short term sources of finance?

Answer 1

• Bank Overdraft - additional temporary money up to an agreed limit
• Trade Credit - provided by suppliers and allows for time between the receiving of supplies before the payment

Question 2

What are the 6 long term sources of finance?

Answer 2

• Personal Savings
• Venture Capital - gained from professional investors
• Share Capital - gained from the selling of shares by an Ltd or a Plc
• Loans - received from banks and involve interest
• Retained Profit - reinvesting profit back into the company
• Crowd Funding - raising money through a crowdfunding platform involving people donating to a start-up

Question 3

What are the advantages and disadvantages of bank overdrafts?

Answer 3

• Flexible
• Important for short-term shortage of cash
• High levels of interest is involved on amount spent
• Bank can order for it to be repaid at any time

Question 4

What are the advantages and disadvantages trade credit?

Answer 4

• Allows for time to receive cash inflows to improve net cashflow
• Interest is not involved
• Can cause bad reputation if not paid back
• Hard to negotiate for small businesses

Question 5

What are the advantages and disadvantages of personal savings?

Answer 5

• Interest is not involved
• Does not lead to loss of control
• Source is limitted
• Funds may be lost

Question 6

What are the advantages and disadvantages of loans?

Answer 6

• Does not lead to loss of control
• Large source of finance
• Involves interest
• Unflexible as interest must be paid

Question 7

What are the advantages and disadvantages of share capital?

Answer 7

• Interest is not involved
• Large source of finance
• Involves loss of control

Question 8

What are the advantages and disadvantages of venture capital?

Answer 8

• Allows for the taking advantage of the venture capitalists’ skills, experience and contacts
• Large source of finance
• Involves loss of control and profits

Question 9

What are the advantages and disadvantages of crowd funding?

Answer 9

• Attracts good, local publicity
• Investors will need a return, such as shares or free access to services/products

Question 10

What are the advantages and disadvantages of retained profit?

Answer 10

• Interest is not involved
• Flexible
• Does not involve loss of control
• Reduces dividends to shareholders