2.2 - Sources of Finance

Question 1

Definition of Owner’s Capital

Answer 1

Money introduced by the existing owner

Question 2

Advantages of Owner’s Capital

Answer 2

• No interest or repayments
• No sharing of profits with partners
• No loss of control to shareholders

Question 3

Disadvantages of Owner’s Capital

Answer 3

• May not be enough cash avaliable from current owner
• Slow way of financing expansion, may miss potential profits

Question 4

Definition of Partners Capital

Answer 4

Money invested by existing partners

Question 5

Advantages of Partners Capital

Answer 5

• No interest or repayments
• New partners can add expertise and share the workloads

Question 6

Disadvantages of Partners Capital

Answer 6

• Control of the business and profits must be shared amongst partners
• Partners may not be able to contribute enough capital

Question 7

Definition of Share Capital

Answer 7

Money invested by shareholders, giving them owners of the company

Question 8

Advantages of Share Capital

Answer 8

• No interest or repayments
• Dividends only paid from what the company can afford
• Shares reduce reduce levels of capital gearing

Question 9

Disadvantages of Share Capital

Answer 9

• Parts of the profits will need to be paid to shareholders
• Potential loss of control
• Large amounts paid can damage cash flow

Question 10

Definition of Debentures

Answer 10

Long-term loans that can be secured against assets of the company

Question 11

Advantages of Debentures

Answer 11

• No loss of control
• No repayments for several years
• No repayments or interest after an agreed date

Question 12

Disadvantages of Debentures

Answer 12

• Interest payable, regardless of financial position of the company
• Large repayments in one lump sum can damage cash flow
• Increase capital gearing

Question 13

Definition of Bank Loan

Answer 13

• Fixed amount that must be repayed with interest over a certain amount of time in equal monthly installments

Question 14

Advantages of Bank Loans

Answer 14

• No further payments after the period
• No loss of ownership
• No lump sum repayments - good for cash flow

Question 15

Disadvantages of Bank Loans

Answer 15

• Interest is an addition cost
• Repayments must be made, regardless of financial position
• Increases capital gearing

Question 16

Definition of Mortgages

Answer 16

Bank loan used to purchase property

Question 17

Advantages of Mortgages

Answer 17

• No repayments after a set period
• No loss of ownership
• Affordable way of purchasing or improving property

Question 18

Disadvantages of Mortgages

Answer 18

• Interest is an additional cost
• Property used as security, so can be repossessed
• Increases capital gearing
• Large deposit may cause cash flow issues

Question 19

Definition of Bank Overdraft

Answer 19

When the business bank account has a negative balance

Question 20

Advantages of Bank Overdraft

Answer 20

• Flexible as the business only borrows and pays interest on what is needed
• No loss of ownership
• Repaid when the business is able to

Question 21

Disadvantages of Bank Overdraft

Answer 21

• Interest is an additional cost
• Rate of interest is often higher than bank loans
• Overdraft facility can be cancelled by the bank without notice