3.1 Sources of Finance

Question 1

Capital Expenditure

Answer 1

Spending on a firm’s fixed assets

Question 2

Revenue Expenditure

Answer 2

Spending on a firm’s general operational costs (day-to-day business expenses)

Question 3

Fixed asset

Answer 3

An asset that is expected to last for more than a year in the business

Question 4

Liquidity

Answer 4

The ability of a firm to pay its short-term debts

Question 5

Solvency

Answer 5

The ability of a firm to pay its long-term debts

Question 6

Internal sources of finance

Answer 6

Funds that come from within the business using their existing assets (eg. personal funds, retained profits, and sale of assets)

Question 7

External sources of finance

Answer 7

Funds that come from outside the business, involving an external stakeholder taking a risk and investing in the company

Question 8

Personal funds

Answer 8

A source of finance for sole traders that comes from their own personal savings

Question 9

Retained profits

Answer 9

Profit that remains after all deductions, including dividends to shareholders, have been made

Question 10

Sale of assets

Answer 10

When a business sells off its unwanted or unused assets to raise funds

Question 11

Sale and lease back

Answer 11

Business selling a fixed asset but immediately leasing the asset back (ownership is transferred to leasing company)

Question 12

Equity finance

Answer 12

Long-term funds provided to a business in return for part ownership which does not have to be repaid

Question 13

Share capital

Answer 13

Money raised through the issuing of shares in a limited company

Question 14

Business angels

Answer 14

Highly affluent individuals who provide financial capital to small start-ups or entrepreneurs in return for ownership equity in their businesses

Question 15

Venture capital

Answer 15

Companies that invest in high-risk and high-potential start ups who then receive profit in return for their investment

Question 16

Debt finance

Answer 16

Money that is borrowed from a financial institution to fund investments, which must be repaid as well as interest costs

Question 17

Loan capital

Answer 17

Money sourced from financial institutions with interest charged on the loan to be repaid

Question 18

Overdrafts

Answer 18

When a bank allows a firm to withdraw more money than it currently has in its account

Question 19

Subsidies

Answer 19

Financial assistance granted by a government to support business enterprises that are deemed beneficial to society/ in the public interest

Question 20

Grants

Answer 20

Funds provided by a government to businesses in a position to help the community, which do not need to be repaid

Question 21

Trade credit

Answer 21

An agreement between businesses that allows for the buyer to pay the seller at a later date

Question 22

Debt Factoring

Answer 22

A financial agreement where the debt fact takes on the responsibility for collecting the debt owed to the business and provides the business with a percentage of the owed debt

Question 23

Leasing

Answer 23

A source of finance that allows a firm to use a fixed asset without having to permanently purchase it

Question 24

Short-term finance

Answer 24

Money needed for the day-to-day costs (revenue expenditure) and solving cash flow issues that lasts for a year

Question 25

Medium-term finance

Answer 25

Money used to finance capital expenditure/ purchase a fixed asset which lasts between 1 and 5 years

Question 26

Long-term finance

Answer 26

Money used to purchase long-term fixed assets and equity finance which lasts between 5 to 30 years