2.1.2 External Finance

Question 1

What is the purpose of collateral when taking a bank loan

Answer 1

Collateral is used to guarantee the loan and reduce the risk of non payment which reduces the interest rate

Question 2

What is meant by peer to peer lending and when might this used by a business

Answer 2

Is when a business and wealthy individual lends to each other. Loans are more likely to be granted and at a lower interest rate than a bank as there are lower overheads

Question 3

What is meant by a business angel

Answer 3

Is a business person who invests in business start ups in return for equity and gives mentoring

Question 4

Distinguish between peer to peer lending and a business angel

Answer 4

Business angel = equity/ mentoring

Peer to peer = debt, no involvement

Question 5

What is meant by crowd funding

Answer 5

When a portal is used where lots of small investors fund new business start ups in return for limited editions stock, shares or discounts

Question 6

Advantage and disadvantage of crowdfunding

Answer 6

Don’t have to pay back, publicity

Not all ideas are funding and hit target

Question 7

What is meant by a loan

Answer 7

Money borrowed and repack with interest over an agreed time period

Question 8

Distinguish between fixed and variable interest rates

Answer 8

Fixed interest doesn’t change for a period of time. Variable can change during the life of the load depending on Bank of England base rate

Question 9

Advantage and disadvantage of a loan

Answer 9

Advantage = no loss of control, interest rates might be very low 
Disadvantage = repayments have to be made even if business is making a loss

Question 10

What is meant by share capital as a source of finance

Answer 10

Is when shareholders provide finance in return for owning parts of the business

Question 11

Advantage and disadvantage of share finance

Answer 11

Advantages = no repayment or interest 
Disadvantage = manage shareholder expectations and loss of control

Question 12

What is meant by venture capital

Answer 12

When professional investors provide finance in return for equity/ shares

Question 13

When might a business use venture capital as a source of finance

Answer 13

Might use this option for more risky projects that aren’t funded by banks, where new investment is needed to expansion when large amounts are needed

Question 14

What is meant by an overdraft

Answer 14

Is a shirt term source of finance where a business can spend money from its current account that it doesn’t have to pay back

Question 15

When would it be appropriate to use an overdraft as a source of finance

Answer 15

Short term lack of funds or more unpredictable shortfalls or expenses

Question 16

Advantage and disadvantage of overdraft

Answer 16

Advantage = only borrow what is needed, so can reduce amounts owed, flexible 
Disadvantage = high interest rates, bank could request full payment at short notice

Question 17

What is meant by leasing

Answer 17

Isnwhere a non current asset is rented rather than brought online

Question 18

Advantage and disadvantage of leasing

Answer 18

Advantage = no upfront capital costs, maintenance and service so expenses predictable 
Disadvantage = never own the asset, can be more expensive than a loan for the same item

Question 19

What is meant by trade credit

Answer 19

Trade credit is when a business purchases raw materials or inventory from suppliers and pays later

Question 20

When might businesses use trade credit as a source of finance

Answer 20

For stock/ inventory

Question 21

Advantage and disadvantage of trade credit

Answer 21

Advantage = improves cash flow because only pay stock after a period of time, by which customer may have paid you 
Disadvantage = interest may be charged if not paid on time

Question 22

What is meant by a grant

Answer 22

A grant is a lump sum given to a business by the government

Question 23

When might a business be able to use grants as a source of finance

Answer 23

Grants are used by business eg are going to benefit society in some way

Question 24

Identify one advantage and one disadvantage to a business of using grants as a source of finance

Answer 24

Advantage = doesn’t need to be repaid and there is no loss of control 
Disadvantage = not all businesses will qualify and there are lengthy approval processes

Question 25

Identify two methods of finance in which interest must be paid to the bank

Answer 25

Interest must be paid to peer to peer lending, loans, overdrafts and sometimes trade credit

Question 26

Which method of finance is not available to sole traders or partnerships

Answer 26

Selling shares, business angel and venture capital is not available to sole traders and partnerships

Question 27

What is meant by limited liability

Answer 27

Limited liability is when the owner of a business can only lose the mount that they out into the business if the business goes bankrupt

Question 28

Which type of business ownership has limited liability

Answer 28

PLC public limited companies and LTD private limited companies

Question 29

What is the name given to the owners of a limited company

Answer 29

Shareholders are the owners of a limited liability company

Question 30

What is meant by unlimited liability

Answer 30

When the owner of the business can lose personal possessions in the business goes bankrupt

Question 31

Which type of business ownership has unlimited liability

Answer 31

Sole traders and partnerships have unlimited liability

Question 32

Which sources of finance are available to sole traders and partnerships

Answer 32

Sole traders and partnerships can use crowd funding, grants, leasing, trade credit, overdraft, loans and led to peer lending

Question 33

Which additional sources of finance are available of LTDS and PLCs

Answer 33

LTDS and PLCs can use all these, plus business angels, venture capital and share capital