2 - External finance

Question 1

what is the difference between a source of finance and a method of finance

Answer 1

a source is where you reciieve the money from, ie a bank
a method is the way you recieve it, in the form of a loan ect

Question 2

examples of methods of finance

Answer 2

venture capital
share capital
overdrafts
banks
trade credit

Question 3

examples of sources of finance

Answer 3

banks
business angels
peer-to-peer funding
crowd funding
family and friends

Question 4

overdrafts

Answer 4

uses more money than they have in a bank account. This means the balance is in minus figures, so the bank is owed money. Overdrafts should be used carefully and only in emergencies as they can become expensive due to the high interest rates charged by banks.

Question 5

trade credit

Answer 5

agreed with a supplier and forms a credit agreement with them. This source of finance allows a business to obtain raw materials and stock but pay for them at a later date.

Question 6

risks of trade credit

Answer 6

failure to pay/late payment may damage the relationship with suppliers

Question 7

Government grants -

Answer 7

are a fixed amount of money awarded by the government. Grants are given to a business on the condition that they meet certain criteria such as providing jobs in areas of high unemployment. These do not usually need to be paid back.

Question 8

leasing

Answer 8

Leasing - is a way of renting an asset that the business requires, such as a coffee machine. Monthly payments are made and the leasing company is responsible for the provision and upkeep of the leased item

Question 9

bank loan

Answer 9

is money borrowed from a bank by an individual or business. A bank loan is paid off with interest over an agreed period of time, often over several years.

Question 10

Venture capital and business angels -

Answer 10

refers to an individual or group that is willing to invest money into a new or growing business in exchange for an agreed share of the profits. The venture capitalist will want a return on their investment as well as input into how the business is run.

Question 11

Share issue

Answer 11

a business may sell more of their ordinary shares to raise money. Buying shares gives the buyer part ownership of the business and therefore certain rights, such as the right to vote on changes to the business.