3.1 Finance and support for a Small Business

Question 1

What are the short term sources of finance?

Answer 1

Trade Credit

Overdraft

Question 2

Give 3 Example of Long term sources of finance

Answer 2

Any 3 from the following:

Bank (Loan)
Own savings
Selling shares
Past sales and profit
Crowd funding
Venture capitalists
Friends and Family
Government Grant

Question 3

What does Equity Capital mean?

Answer 3

Money is put into the business by its owners

Question 4

What sources of finance does small businesses use?

Answer 4

Own savings

Investments from Partnerships, shareholders, friends and family

Question 5

What is the main source of finance for a small business?

Answer 5

Banks

Question 6

What are the most common type of bank loans?

Answer 6

Overdraft

Mortgage

Question 7

What is an overdraft?

Answer 7

Firms are allowed to be in the red for a short period of time

Question 8

What type of bank account is an overdraft used in?

Answer 8

Current Account

Question 9

What are firms given?

Answer 9

Firms are given an overdraft limit which they can’t exceed

Question 10

Give the advantages and disadvantages of an overdraft

Answer 10

Advantages:

Lets you pay into a negative balance
Gives time to pay money back that you own
Easily get hold of cash

Disadvantages:
Limit to how much money you can withdraw
High Interest Rate

Question 11

What is Trade Credit?

Answer 11

Business doesn’t pay for goods until one month after they’ve been delivered

Question 12

Give the advantages and disadvantages of Trade Credit

Answer 12

Advantages:

It’s an interest free loan for the company buying goods
Increases work capital for business

Disadvantages:

If business owes too much money, the supplier might stop working with them until money is repaid
Companies that get trade credit are likely to give it to their clients

Question 13

What is the difference between a lease and a hire purchase?

Answer 13

Lease - A contract where a product/house is rented

Hire Purchase - A system where the business pays in regular instalments while using it

Question 14

What is a Mortgage?

Answer 14

Money borrowed from the bank when buying a house and this is payed back with monthly payments over a number of years

Question 15

Give the advantages and disadvantages of a mortgage

Answer 15

Advantages:

Has a fixed rate
Structured repayments every month

Disadvantages:

The interest rate may vary which can become expensive
The lender may insist on a deposit

Question 16

Give 2 Sources of advice for Finance and describe what they do

Answer 16

2 from the following:

High Street Banks - They offer business banking advice to new businesses. The advice offered includes free consultations with accounts or lawyers and provide help completing a business plan

Government Grants - Financial award offered to unemployed people to train and start their own business. This can also be offered to companies that are willing to invest and set up their own business in areas of low income and high unemployment

Accountants and Solicitors:

Accountants offer advice to large businesses and support with finance (selecting best loans and the correct amount of tax)

Solicitors help with legal issues such as selecting the correct legal structure

Question 17

What is the difference between an accountant and a solicitor?

Answer 17

Accountants:

Offers advice to large businesses and support with finance such as selecting the best loans and correct amount of tax

Solicitors:

Helps with legal issues such as selecting the correct legal structure