2.1.1 /2.1.2 Sources of finance

Question 1

why might a business need to raise finance?

Answer 1

-to start up
-to grow
-if they are having cash flow problems
-extra materials need to be bought in larger orders

Question 2

name some internal finance sources

Answer 2

-personal savings
-retained profit
-sale of assets

Question 3

personal savings

Answer 3

internal
-used as start-up finance
-money can be provided in form of share capital or a loan

Question 4

retained profit

Answer 4

-profit a firm has earned and re-invested into the business
-safe and common form of finance for established businesses

Question 5

sale of assets

Answer 5

-selling unused or unnecessary assets to help raise funds
-useful for when established businesses are changing strategies

Question 6

name some external finance sources

Answer 6

-family and friends
-bank loans
-peer-to-peer funding
-business angels
-crowdfunding

Question 7

family and friends

Answer 7

external
-provide extra necessary start up capital to start up
-could be in a form of loans, or take an equity stake in a limited company business

Question 8

bank loans

Answer 8

external
-start ups are too high risk for this
-banks insist on some collateral as security

Question 9

peer-to-peer funding

Answer 9

external
-relies on websites that can match investors willing to lend money to start up businesses
-loans have a high interest rate, but next best option if banks are unwilling to lend money

Question 10

business angels

Answer 10

external
-rich individuals provide capital to high risk, small businesses
-wish to be involved in the strategic management of the business in the hope of high returns

Question 11

crowdfunding

Answer 11

external
-this has risen due to the internet, small investors can invest in start ups
-lots of small investors gather to provide all the finance necessary

Question 12

give some methods of finance

Answer 12

-overdrafts
-venture capital
-share capital
-leasing
-trade credit
-grants

Question 13

overdrafts

Answer 13

banks allow companies to borrow money up to a max limit when required
-they can be flexible, but they have a high interest rate

Question 14

venture capital

Answer 14

used for higher risk businesses
-firms or individuals invest in innovative and high risk projects in return for a stake in the business

Question 15

share capital

Answer 15

only used by a limited company
-ownership of private company is split into shares which can be sold to investors, becoming shareholders
-capital enters the business as share is first sold

Question 16

leasing

Answer 16

only used for major assets
-avoids large chunks of cash outflows each time a major new asset is purchased
-in the long term it is expansive, it strains cash flow a lot

Question 17

trade credit

Answer 17

start ups struggle to convince suppliers to offer them credit
-this is common in B2B transactions
-offered to customers- usually around 2 months
-goods or services provided by a supplier are not paid for immediately

Question 18

grants

Answer 18

handouts from a local or central government for small businesses
-this encourages businesses as they create jobs in areas of economic deprivation or hi-tech firms competing with foreign rivals