1.3.5 Sources of Finance

Question 1

Uses of Short Term finance

Answer 1

Get through periods of poor cash flow
Bridge the gap when large payments are delayed
Provide extra cash for manufacturing if there is a sudden change in demand

Question 2

Overdraft

Answer 2

An agreement with a bank where the business can overspend on their bank. These usually have high interest and should only be used for emergencies. They have variable interest rates.
The flexibility means it will only be used when it has to
High interest meaning very expensive to repay

Question 3

Selling assets

Answer 3

Selling unwanted equipment or machinery to regain some cost
No interest as selling businesses possesions
May not be valued meaning only a small financial gain

Question 4

Trade Credit

Answer 4

Negotiated with suppliers. This is when a business obtains stock but pays for it at a later date. There will be a credit period for how long the business has to repay.
It can improve short term cashflow
A good relationship with suppliers is neccesary

Question 5

Long term finance

Answer 5

Money that is repaid or gained over a long time

Question 6

Crowdfunding

Answer 6

A business sets a target amount of money to raise.
The business idea is posted on a crowdfunding website
A wide range of investors pledge to invest a certain amount in return for a share of the company
If the business reaches the target then it receives all the pledged funds

Question 7

Personal savings

Answer 7

Money saved up by the entrepreneur.
There is no interest so does not cost the business
The money is only available if the entrepreneur has saved it

Question 8

Venture Capital

Answer 8

Money invested by an individual or group that is willing to take risks of funding new businesses in exchange for an agreed share of profits
Increased cash in the business reducing risk of insolvency
Loss of profits as investors take share of profit

Question 9

Shareholder

Answer 9

Money raised by shareholders through the sale of shares. Buying shares gives the buyer part ownership of the business giving them some say on how the business is ran
No dividens to be paid if the business has a poor year
Loss of control from the owner as ownership is shared out

Question 10

Bank Loan

Answer 10

Money loaned from a bank that is paid off over a set period of time with interest
Set payments come out over a period of time so it can be accounted for in cash flow forecast
Collateral may have to be put up in order to get the loan

Question 11

Retained profit

Answer 11

When a business makes profit, it can leave some or all the money to be reinvested to expand
No interest as it is the businesses own money
Profit is required to have the source of finance