2.1.2 External Finance - methods of finance - short term

Question 1

7 methods of finance

Answer 1

Short term ones Long term ones:
-1) Overdrafts 1)Bank Loans
2) Leasing 2) Share Capital
3) Grants 3) Venture Capital
4) Trade credit

Question 2

Trade credit

When do you usually pay?

Answer 2

When a business buys a good/service and doesn’t have to pay straight away

• usually pay within an agreed time limit after receiving the product e.g 30-90 days

Question 3

an advantage of trade credit - 1

Answer 3

Good on cash flow
no cash need upfront and can pay at a later date
You’re generating revenue before you pay

Question 4

2 disadvantages of trade credit

Answer 4

• Delays of payment can hinder relationships with suppliers

-May also get a bad credit rating, making it harder to get credit from suppliers & finance in the future

Question 5

Government grant

Answer 5

Fixed sum of money given to a business often by a government

Question 6

Government grants are usually given to what sort of projects

Answer 6

Usually give to specific type of projects that may benefit society

Question 7

In order to get a grant what do businesses have to

Answer 7

Businesses have to apply to get a grant

• need to supply lots of information e.g financial position, the project( how many jobs it will create etcetc )

Question 8

2 biggest Advantages of government grant

Answer 8

• Don’t have to be repaid & no interest paid too
• no share of the business has to be given up

Question 9

2 Disadvantages of government grant

Answer 9

• usually have to meet a certain type of criteria - if fail to meet it you get no grant
• Long & time consuming process for the application process

Question 10

Bank overdraft

Answer 10

An agreement between a business & a bank that means a business can spend more money than it actually has in their account.
- it’s a negative amount of money in it’s bank account

Question 11

What are the characteristics of a bank overdraft

e.g is it difficult to arrange? is it unflexible?

How much can a business borrow?

Answer 11

overdrafts are easy to arrange and are flexible.

• Businesses can borrow as little or as much as they need( up to the overdraft limit)

Question 12

How much interests do you pay when you use an overdraft

Answer 12

only pay interest on the amount of the overdraft you actually use.

Question 13

2 Advantages of overdrafts

Answer 13

• Flexible - can use it whenever needed or when having cash flow trouble
• Interests only paid on amount borrowed

Question 14

2 disadvantages of overdrafts

Answer 14

• Banks charge higher interest rates on them
• Banks can recall the money at any point of time. This if it suspects that the business is struggling & unlikely to repay what is owed.

Not suitable in the long run

Question 15

Leasing

Answer 15

Means paying monthly sums of money over a set period of time, in return for use of the asset

Question 16

If a businesses doesn’t have enough money to buy assets what can they do?

Answer 16

They can lease the assets instead

Question 17

1 Advantage of leasing

Answer 17

• No large sums of money needed to buy the use asset

Question 18

Disadvantage of leasing

Answer 18

• Can be more costly in the long run than buying the asset outright