2.1.1 : Sources Of Finance

Question 1

What types of long term sources of finance ?

Answer 1

Share capital
Retained profits
Venture capital
Mortgages
Long-term bank loans

Question 2

What types of short term sources of finance are there ?

Answer 2

Bank overdraft
Trade creditors
Short-term bank loans
Factoring (selling your debt)

Question 3

What are the key considerations in choosing sources of finance ?

Answer 3

How much is needed - safety buffer
When is it needed - all at once + drip fed
The challenges - keeping control + staying afloat

Question 4

What is finance needed for ?

Answer 4

A business set up
Day-to-day trading
Growth and development

Question 5

What factors affect your choice in source of finance ?

Answer 5

What is the finance needed for e.g. is it to finance long-term projects.
The cost of the finance - bank loans incurs interest which is additional cost
The flexibility of the finance
The business organisational structure

Question 6

What are the main sources of finance for a start up business ?

Answer 6

Internal sources : Founder finance , retained profits , friends and family
External sources : Bank loan , bank overdraft , Business angels , loans + grants

Question 7

What different types of founder finance is there ?

Answer 7

Cash + investments
Redundancy payments
Inheritances
Personal credit cards
Re-mortgaging

Question 8

Why are personal sources of finance important to start-up businesses ?

Answer 8

Cheap (e.g. compared to a bank loan)
Entrepreneur keeps more control over the business

Question 9

What are the main internal + external sources of finance that an established business would use ?

Answer 9

Internal sources : retained profits , working capital , asset disposals
External sources : issue shares, bank loan , overdraft , debentures , venture capital , suppliers

Question 10

What are the main benefits of using retained profit as a source of finance ?

Answer 10

Cheap (though not free)
Very flexible - management control how they are invested
Do not dilute ownership of the company

Question 11

What are the main drawbacks of using retained profit as a source of finance ?

Answer 11

Danger of hoarding cash
Shareholders may prefer dividends if the business is not sufficiently achieving high returns on achievement
High profits + cash flows would suggest the business could afford debt

Question 12

How does working capital work as a source of finance ?

Answer 12

It is a short-term source of finance used for day-to-day financing. It lowers your working capital as a business (drawback) + the finance provided from it is often wasted in excess stocks and trade debtors (drawback).
Business should use it if they have very low inventory turnover ratio or high debtor days.

Question 13

How does issuing shares work ?

Answer 13

1. Company issues new shares
2. Shareholder buy new shares
3. Company has more cash + more shareholders

Question 14

What are the benefits of issuing shares as a source of finance ?

Answer 14

Able to raise substantial funds if the business has good prospects
Border base of shareholders
Equity rather than debt=lower risk finance structure

Question 15

What are the drawbacks of issuing shares as a source of finance ?

Answer 15

Can be costly and time-consuming
Existing shareholders ownership may be diluted
Equity has a cost of capital that is higher than debt

Question 16

How does a bank loan work as source of finance in the business ?

Answer 16

It is a long term source of finance
It is good for financing investment in fixed assets
Generally at a owner rate of interest than a bank overdraft
However, they do not provide much flexibility in terms of payment times and interest rates.

Question 17

How does a bank overdraft work as a source of finance in a business ?

Answer 17

It is a short term source of finance used by all types of businesses.
he bank lets the business go pass zero in their balance and then pay it off in return they pay it off with a high interest rate and in a short amount of time.
It is a flexible source of of finance in a sense that it is only used when needed
They are helpful in businesses handle seasonal fluctuations , etc.

Question 18

What are the advantages of using a bank loan as a source of finance in a business ?

Answer 18

Greater certainty of funding
Lower interest rate
Appropriate method of financing fixed assets

Question 19

What are the drawbacks of using a bank loan as a source of finance for a business ?

Answer 19

Requires security
Interest paid on full amount outstanding
Harder to arrange

Question 20

What are the advantages of using a bank overdraft as a source of finance in a businesses ?

Answer 20

Relatively easy to arrange
Flexible
Interest is only on the amount borrowed under the facility

Question 21

What are the drawbacks of using a bank overdraft as a source of finance for a business ?

Answer 21

Bank can withdraw at short notice
Interest charge varies with change in interest rates
Higher interest rates than a bank loan

Question 22

What is a debenture ?

Answer 22

Is a form of bond or long term loan which is issued by the company usually with a fixed rate of interest

Question 23

What are the key features of debentures ?

Answer 23

Long term
Issued by the company not the bank
Fixed rate of interest
Usually secured against the assets of the company
Can be traded

Question 24

What are venture capitalists and their key features ?

Answer 24

Specialists investors in private companies
They manage investment funds designed to achieve high rates on returns
Tend to focus on big investments
Will seek a large share of the share capital
Look to sell their investment after 5-7 years

Question 25

What are the advantages of the venture capitalist ?

Answer 25

Can raise substantial amounts
Business benefits from specialist investor support
Brings better discipline to management
Helps original business owners realise heir investment

Question 26

What are the drawbacks of using venture capitalists as a source of finance ?

Answer 26

Requires a high rate of return
Investment often supported by a high level of and debt
Not a long term investment
Loss of control

Question 27

What are the drawbacks of using venture capitalists as a source of finance ?

Answer 27

Requires a high rate of return
Investment often supported by a high level of and debt
Not a long term investment
Loss of control

Question 28

How does raising finance from suppliers work for a business ?

Answer 28

Suppliers provide goods and services in advance of payment = trade creditors
As a business expands soo does its payments to their suppliers
If a business builds a good relationship with their suppliers they may be able to work out better payment terms

Question 29

What is peer-to-peer funding and its key features ?

Answer 29

Connects businesses looking for finance with individuals willing to invest or loan.
Managed online by intermediaries
Effectively cuts out the role of banks
Increasingly popular for fast growing established businesses

Question 30

What is crowdfunding and its key features ?

Answer 30

Connects businesses that are looking for equity investment with potential investors