3.1.6 sources of finance

Question 1

Why do businesses need finance

Answer 1

• Start up costs(money or assets to set up)
• finance to cover cash flow
• finance to cover delayed payments
• day to day running 🏃‍♀️ costs
• Expansion

Question 2

What is internal finance

Answer 2

• Finance that come from within the business
• can be quick and easy
• no interest pay back

Question 3

Examples of internal sources of finance

Answer 3

• Selling fixed assets
• retained profit
• personal/ business savings

Question 4

What are externtal sources of finance

Answer 4

• External finance comes from outside the business
• normally has to be payed back
• high inter

Question 5

Examples of external sources of finance

Answer 5

• Bank loans, overdrafts, mortgages
• loans from family and friends
• new share issues
• trade credit
• government grants
• hire purchasing

Question 6

Government grants

Answer 6

pros

• Given to new small businesses (sole traders)
• don’t have to be repaid

cons

• has a specific criteria
• less options than a loan
• money may have to be spent in specific way

Question 7

Trade credit

Answer 7

pros

• Business may give firms 1 or 2 months to pay of a purchase
• gives time for a small firm to pay

cons

• Business’s may not pay on time and end up with a large fee to pay

Question 8

Overdraft

Answer 8

Pros

• lets a form take out more money than that have in their bank
• alow business to pay on time without enough cash
• good for small businesses

cons

• high interest rate
• Bank can cancel at anytime
• if not payed back bank can take some of the businesses assets

Question 9

Bank loans

Answer 9

Pros

• quick and easy
• usually low interest rates

cons

• Interest
• if not payed back in time bank can repossess firms assets

Question 10

Family and friends

Answer 10

Pros

• may not need to be payed back
• no interest
• easy

cons

• limited amount of cash available
• can hurt relationships
• may expect a share in the profits

Question 11

Mortgages

Answer 11

Finance loans for buying properties

pros

• low interest rates

cons

• Properties used for collateral-means the business can take the properti if it’s not pages back

Question 13

Hire purchase

Answer 13

Pros

• Only pay a deposit to but the equipment
• can be payed in regular instalments while they can still use the tools
  *

Question 14

Retained profits

Answer 14

• Established firms can use this
• assets that the owners have kept in the business after they payed a dividend

cons

• shareholders want large dividends
• reducing profits retained

Question 15

Fixed asw

Answer 15

• Selling fixed assets for a short term boost

cons

• resale value may be lower
• Firm may want the asset back
• limit to how many can be sold

Question 16

New share issues

Answer 16

• Limited company can issue more shares
• no repayment to shareholders

cons

• if too many shares are sold the business can loose control
• Shareholders may want dividends

Question 17

4 factors affecting the choice of finance

Answer 17

• Size an type
• amount of money needed.
• Length of time -short-term or long term
• cost of finance