3.1 Sources of finance

Question 1

Business angels

Answer 1

Business angels are wealthy entrepreneurs who risk their own money by investing in small to medium-sized businesses that have high growth potential.

Question 2

Capital expenditure

Answer 2

Capital expenditure is investment spending on fixed assets such as the purchase of land and buildings.

Question 3

Debt factoring

Answer 3

Debt factoring is a financial service whereby a factor (such as a bank) collects debts on behalf of other businesses, in return for a fee.

Question 4

External sources of finance

Answer 4

External sources of finance means getting funds from outside the organization, e.g. through debt (overdrafts, loans and debentures), share capital, or the government.

Question 5

Grants

Answer 5

Grants are government financial gifts to support business activities. They are not expected to be repaid by the recipient.

Question 6

Initial public offering (IPO)

Answer 6

Initial public offering (IPO) refers to a business converting its legal status to a public limited company by floating (selling) its shares on a stock exchange for the first time.

Question 7

Internal sources of finance

Answer 7

Internal sources of finance means getting funds from within the organization, e.g. through personal funds, retained profits and the sale of assets.

Question 8

Leasing

Answer 8

Leasing is a form of hiring whereby a contract is agreed between a leasing company (the lessor) and the customer (the lessee). The lessee pays rental income to hire assets from the lessor, who is the legal owner of the assets.

Question 9

Loan capital

Answer 9

Loan capital refers to medium to long-term sources of interest-bearing finance obtained from commercial lenders. Examples include mortgages, business development loans and debentures.

Question 10

Overdrafts

Answer 10

Overdrafts allow a business to spend in excess of the amount in its bank account, up to a predetermined limit. They are the most flexible form of borrowing in the short term.

Question 11

Retained profit

Answer 11

Retained profit is the value of surplus that the business keeps to use within the business after paying corporate taxes on its profits to the government and dividends to its shareholders.

Question 12

Revenue expenditure

Answer 12

Revenue expenditure refers to spending on the day-to-day running of a business, such as rent, wages and utility bills.

Question 13

Sale-and-leaseback

Answer 13

Sale-and-leaseback is a source of external finance involving a business selling a fixed asset (such as its computer systems or a building) but immediately leasing the asset back. In essence, the lessee transfers ownership to the lessor but the asset does not physically leave the business.

Question 14

Share capital

Answer 14

Share capital is the money raised from selling shares in a limited liability company, from its initial public offering (IPO) and any subsequent share issues.

Question 15

Share issue (also known as a share placement)

Answer 15

Share issue (also known as a share placement) exists when an existing public limited company raises further finance by selling more of its shares.

Question 16

Sources of finance

Answer 16

Sources of finance is the general term used to refer to where or how businesses obtain their funds, such as from personal funds, retained profits, loans and government grants.

Question 17

Subsidies

Answer 17

Subsidies are funded by the government to lower a firm’s production costs as output provides extended benefits to society, e.g. farmers are often provided with subsidies to stabilise food prices.

Question 18

Trade credit

Answer 18

Trade credit allows a business to ‘buy now and pay later’. The credit provider does not receive any cash from the buyer until a later date (usually allow between30-60 days).

Question 19

Venture capital

Answer 19

Venture capital is high-risk capital invested by venture capital firms, usually at the start of a business idea. The finance is usually in the form of loans and/or shares in the business venture.