3.1 Sources of finance

Question 1

Short-term finance

Answer 1

Money borrowed for 1 year or less

Question 2

Long term finance

Answer 2

Money borrowed for more than 1 year

Question 3

Capital

Answer 3

Finance provided by the owners of a business

Question 4

Personal savings

Answer 4

Money saved up by the owner of the business (important for sole traders)

Question 5

Retained profit

Answer 5

Profits given to those who paid for a share in the company through dividends.

Question 6

Assets

Answer 6

Resources used or owned by a business, such as cash, stock, machinery tools and equipment.

Question 7

Pro and Con of personal savings

Answer 7

• Don’t have to repay
• Quick and easy to access
  BUT
• Long time to build up
• Opportunity cost - can’t be used elsewhere

Question 8

Pro and Con of Retained profit

Answer 8

• Choose where money goes
• Don’t have to repay
  BUT
• Start-ups may not have retained profit

Question 9

Pro and Con of selling assets

Answer 9

• Quick way to raise cash
  BUT
• Assets lose value over time (depreciate)
• May need to repurchase in the future

Question 10

What are short term funds?

Answer 10

Money that has been borrowed or invested and paid back for under 1 year

Question 11

What is a credit card?

Answer 11

An account that the business can make purchases with in return for monthly payments with interest.

Question 12

What is a bank loan?

Answer 12

An agreed amount the bank will loan in return for monthly payments with added interest.

Question 13

Define Overdraft

Answer 13

A short-term borrowing allowing someone to spend past zero in their bank, this is repaid with interest.

Question 14

Define Mortgage

Answer 14

Long term loan usually on a property over 30-50 years, repaid with interest.

Question 15

What is share capital?

Answer 15

Shareholders purchase more shares in the business in return for a share of profit, possibly dividends. (FUNDS FROM INVESTORS OR SHAREHOLDERS)

Question 16

What is a Business angel/Venture capital

Answer 16

A business specialist who invests in a business (usually new) in return for a share of profits. They also offer expertise and guidance.

Question 17

What is a government grant?

Answer 17

‘free’ money to help fund business activity, does not need to be repaid.

Question 18

Pro and Con of credit cards

Answer 18

• Easily available
  BUT
• Can have high interest rates

Question 18

Pro and Con of bank loans

Answer 18

• Larger sums to invest or expand
  BUT
• May be vulnerable to changing interest rates

Question 18

Pro and Con of overdrafts

Answer 18

• Help with short-term cash flow
• No security needed
  BUT
• Repayable on demand
• Often high interest rates

Question 19

Pro and Con of mortgage

Answer 19

• Enables repayments over long-term
  BUT
• May be vulnerable to changing interest rates

Question 20

Pro and Con of share capital

Answer 20

• Potentially more funds available
• Enables large scale investments
  BUT
• May be expensive to set up
• Shared control
• Share values can rise and fall

Question 21

Pro and Con of government grants

Answer 21

• Grants not repayable
• Loans often cheaper than bank
  BUT
• Usually limited in size
• Use may be restricted

Question 22

Pro and Con of business angel / venture capital

Answer 22

• May give tax benefits to investors
  BUT
• Needs clear exit strategy for investor
• Shared control

Question 23

Crowd funding

Answer 23

Where a large number of individuals (a crowd) invest in a business venture using an online platform and therefore avoid using a bank