2.1.1/2 INTERNAL/EXTERNAL FINANCE

Question 1

what is owners capital

Answer 1

personal savings of the original owner of a business

Question 2

what is retained profit

Answer 2

the profit that has been generated in previous years and not distributed to owners is reinvested back into the business

Question 3

what is sale of assets

Answer 3

selling of business assets which are no longer required generates a source of finance

Question 4

benefits of using internal finance

Answer 4

• doesn’t include 3rd parties who may want to influence business decisions
• often free and no payment of interest

Question 5

disadvantages of using internal finance

Answer 5

• significant opportunity cost
• may not be sufficient funds

Question 6

what is external finance

Answer 6

sourced from outside the business

Question 7

what is internal finance

Answer 7

sourced from within the business

Question 8

advantage of family and friends finance

Answer 8

• usually a very cheap source of funds
• may have ‘no strings attached’

Question 9

disadvantage of family and friends finance

Answer 9

• relationships may be damaged if the finance isn’t repaid

Question 10

banks as a source of finance

Answer 10

they provide several types of loans to businesses

Question 11

advantages of bank loans

Answer 11

• may offer both short and long term finance
• often provide free advice
• quick to obtain

Question 12

disadvantages of bank loans

Answer 12

• business plan is required to obtain one
• interest
• businesses must be customers of the bank to request a loan

Question 13

what’s peer to peer funding

Answer 13

individuals with savings available to them often take this money and pool it with others in a peer investment scheme such as a funding circle

Question 14

advantages of using p2p funding

Answer 14

funding circle can then make loans available to businesses very quickly

Question 15

disadvantages of using p2p funding

Answer 15

borrowers are charged a fee to access finance and have to pay interest

Question 16

what are business angels

Answer 16

wealthy individuals who invest in small startups for a stake in the company, offering not just funds but also expertise and networking

Question 17

advantages of business angels

Answer 17

• tend to be more willing to take a risk than banks are
• they have experience and expertise

Question 18

disadvantages of business angels

Answer 18

• potential conflicts over decision making
• risk of loosing control over the business

Question 19

what’s crowdfunding

Answer 19

collecting small amounts of money from a large number of people, typically through online platforms

Question 20

advantages of crowdfunding

Answer 20

• access to a large pool of potential investors, - increased exposure for the business
• validation of the idea by the crowd
• potential for early customer engagement

Question 21

disadvantages of crowdfunding

Answer 21

-the need to meet campaign goals to receive funds
- platform fees
- potential intellectual property risks
- the challenge of standing out among many campaigns

Question 22

what is share capital

Answer 22

finance raised from the sale of shares in a limited company

Question 23

advantages of share capital

Answer 23

• raising funds without incurring debt
• sharing financial risk among shareholders
• attracting investors with profit-sharing potential
• enhancing the company’s credibility

Question 24

disadvantages of share capital

Answer 24

• dilution of ownership for existing shareholders
• potential loss of control over decision-making - the obligation to pay dividends to shareholders

Question 25

what is venture capital

Answer 25

funds provided by specialist investors in small to medium sized businesses that have significant potential for growth

Question 26

advantages of venture capital

Answer 26

- access to substantial funding - expertise and guidance from experienced investors - networking opportunities - potential for rapid business growth

Question 27

disadvantages of venture capital

Answer 27

- loss of control and decision-making power - pressure to achieve high growth targets - potential conflicts with investors - the need to give up equity in the business

Question 28

what's an overdraft

Answer 28

an arrangement for business current account holders to spend more money than it has in their account

Question 29

advantages of overdrafts

Answer 29

- flexibility in borrowing - quick access to funds - interest charged only on the amount overdrawn - the ability to cover short-term cash flow gaps

Question 30

disadvantages of overdrafts

Answer 30

- high-interest rates - potential for unexpected fees - dependency on short-term borrowing - the risk of overdrawing beyond the agreed limit

Question 31

what is leasing

Answer 31

an asset such as a piece of machinery is used by the business in return for regular payments to the suppliers

Question 32

advantages of leasing

Answer 32

- the business doesn't own the asset so is not responsible for maintenance or repair costs - lower initial costs - access to newer equipment - flexibility to upgrade - potential tax benefits

Question 33

disadvantages of leasing

Answer 33

- higher overall costs compared to purchasing - restrictions on customisation - potential for long-term financial commitments - the lack of ownership of the leased assets

Question 34

what is trade credit

Answer 34

when an agreement is made with suppliers to buy raw materials which are payed for at a later date

Question 35

advantages of trade credit

Answer 35

- usually interest free - improved cash flow - potential for extended payment terms - opportunity to build relationships with suppliers - flexibility in managing short-term financing needs

Question 36

disadvantages of trade credit

Answer 36

- potential strain on supplier relationships - higher overall costs due to interest or fees - risk of dependency on credit terms - the impact on credit ratings if payments are delayed

Question 37

what are grants

Answer 37

when governments and industry trusts may offer grants to businesses that meet specific criteria

Question 38

advantages of grants

Answer 38

- don't need to be repaid

Question 39

disadvantages of grants

Answer 39

- restrictions on fund usage - reporting requirement

Question 40

what is unlimited liability