2) Obtaining Finance

Question 1

Why may a business need financing

Answer 1

1. To start the business
2. TO expand the business
3. To run the business

Question 2

What are the two main methods available for financing a business

Answer 2

Equity financing: Money contributed by the owner
Debt Financing: Borrowings or money provided to the business for a limited period of time.

Question 3

What is internal financing

Answer 3

Refers to sources of finance found inside the business

Question 4

Examples of internal financing

Answer 4

1. Retained profits: Profits which are reinvested into the business
2. Sale of non-current assets not in current use.

Question 5

What is external financing:

Answer 5

Refers to sources of finance found from outside of the business.

Question 6

Examples of external financing:

Answer 6

1. Credit card: A plastic card issued by a bank which allows the holder to purchase goods and services on credit.
2. Trade credit: given by teh supplier to the business when purchasing items such as raw materials and inventory.
3. Bank overdraft: an agreement with the bank to withdraw more money from an account than has been deposited.
4. Leasing: An agreement with another entity to rent an item for a fixed period of time

Question 7

Factors considered by financial institutions: Risk

Answer 7

1. Collateral: Refers to any property or asset that a borrower provides to the lender as a way to secure the loan. If the borrower defaults on their repayments, the lender can then seize the asset to recoup its losses. Secured loans typically have lower interest rates compared to unsecured loans.
2. Liquidity: Assesses the ability of the borrower to make regular repayments of the debt as they fall due.
3. Credit History: Is a record of the borrowers ability to repay debts and their demonstrated ability in repaying debts.
4. Guarantors: Are people who guarantee to pay the amount of the loan if the primary borrower defaults on their repayments.

Question 8

Factors considered by financial institutions: Reward

Answer 8

1. Interest Rates
2. Future business: Analyses the businesses future projections. The more potential, the less riskier the loan and hence more return, and hence shows that they are a worthwhile investment.