3.2

Question 1

how can sourceless of finance be catorgaised first level?

Answer 1

time and type

Question 2

how can sources of finance be categorised second layor?

Answer 2

Type- internal and external
time- short term and long term

Question 3

what is an internal source of finance?

Answer 3

Internal sources of finance is money obtained within the business, usually an stablished one.
These sources could be: personal funds, retained profit or sale of assets.

Question 4

one of the internal sources of funding is personal funds, what is this?

Answer 4

this is the main source of finance for sole traders and partnerships, where the money comes from their own savings.

Question 5

what are some advantages of personal funding?

Answer 5

Control can be kept (since own money was invested)
Shows commitment to the business in case more funds are needed, such as bank loan.
Easily available and cheap with no interest rates to pay

Question 6

what are the disadvantages of personal funding?

Answer 6

Great risk (they could be investing their life savings)
If it is the only source of funding it might not be enough to start or maintain the business.

Question 7

what is retained profit (internal)?

Answer 7

it is the value of the profits that the business keeps after paying corporate taxes and dividends to shareholders. They are normally used to reinvest in the business or for purchasing more assets the organization might need.

Question 8

what are the advantages of retained profit as a internal source of finance?

Answer 8

it is cheap because no interest rates need to be paid.

it is a permeant source of finance and does not need to be repaid.

it is flexible, the business can spend the money how they want.

The owners have control of the Retain profits, without the interference of another financial institution.

Question 9

what are the disadvantages for retained profit?

Answer 9

start up business do not have any retained profits.

if retained profits are too low there will be no room for business expansion.

the owners can over used the retained profit leaving non for emigernices for business expansion.

A very high level of Retain profits means that not enough is either reinvested in the company or not enough is given to the shareholders.

Question 10

what are sales of assets (internal)?

Answer 10

this is when a business sells some of their unwanted assets, remaining land or buildings.

Question 11

what are the advances of selling assets (internal)?

Answer 11

Good way of generating cash from unwanted or extra assets
No interest has to be paid

Question 12

what are some disadvantages of selling assets?

Answer 12

It might be only available for established businesses and not start-up ones.
Might be time consuming to look form potential buyers

Question 13

one of the external finance sources is share capital, what is this?

Answer 13

share capital is the main source of finance for most limited companies.

The company sells its shares to raise money and the buyers of the shares are called Shareholders.

The company also decides the authorised shared capital, which is the maximum amount of shares they can sell.

Question 14

what are some advantages of share capital?

Answer 14

Permanent source of capital as it will not need to be repaid by the business (redeemed)
No interest payments needed

Question 15

what are some disadvantages of share capital?

Answer 15

Shareholders will expect to be paid dividends when the business makes profit.
The ownership of the company may change or be diluted due to a probable large amount of shares sold.

Question 16

what is loan capital?

Answer 16

is money sourced from financial institutions such as Banks. Interest charges are imposed on the loan and this could be either fixed or variable.

Question 17

what is the difference between fixed interest rate and variable interest rate?

Answer 17

Fixed interest rate – does not change and remain fixed the entire time of the loan
Variable interest rate – changes constantly based on market conditions.

Question 18

give three examples of loan capital.

Answer 18

Mortgage – a secured loan for the purchase of a property (if the borrower fails to pay the mortgage the lender can reposes the property)

Business development loan – highly flexible loans that businesses use to start or expand their business or to purchase new equipment.

Debentures – long term loans issued by a business or Government (they do not need a collateral! they are based on creditworthiness and reputation of the issuer.
However debenture holders receive interest payment even if the business makes a loss. Debenture issuers, however do not have ownership in the business or right to vote.

Question 19

what are some advantages of loan capital?

Answer 19

Accessible and can be arranged quickly
Repayments spread over a period of time (medium to long-run)
The owners have full control of the business since no shares are sold.
Large organizations can negotiate lower interest rates depending on the amount they borrow.

Question 20

what are some disadvantages of loan capital?

Answer 20

The businesses have to pay the loan (capital needs to be redeemed) even if the company is making losses.
Failure to pay the loan might lead to repossession of company’s assets
In cases if variable interest rate, the company might lose if the interest rate increased due to market conditions.

Question 21

what is an overdraft?

Answer 21

an overdraft allows a business to withdraw more money than it has in its account, meaning temporarily overdraw.

Overdrafts are mainly used when business have cash problems and normally face higher interest rate.

The amount to be overdrawn is agreed in advanced and the interest is charged ONLY on the amount overdrawn. However, if the overdraft exceeds the limit there will be additional costs.

Question 22

what are the advantages of an overdraft?

Answer 22

Gives the business the opportunity to spend more than they have for emergencies (i.e. paying suppliers)

Flexibility for business that may face cash flow problems

Since interest rate is ONLY on the overdraft amount, it might be cheaper than a regular loan.

Question 23

what are the disadvantages of an overdraft?

Answer 23

Banks can ask for overdrafts to be paid back in a very short time with no prior notice.

intrest rates tend to be high in comparison to a bank loan.

Question 24

what is trade credit?

Answer 24

This is an agreement between businesses that allows the buyer of goods and services to acquire them in the present and pay for them latter (buy now and pay later).
Organizations that offer Trade credits are called Creditors and the consumers of the credit are called Debtors.
The credit period offered ranges from 30 to 90 days and no immediate cash is required.

Question 25

what are the advantages of trade credit?

Answer 25

Business are in a better cash-flow position since they do not have to pay money upfront
No interest rate has to be paid
A trial use of the product might be possible

Question 26

what are the disadvantaged of trade credit?

Answer 26

Buyers might lose out of possible discounts of buying upfront
Delaying payment to creditors might not only lead to poor relationship with suppliers but also refusal to work with them in the future.
The business could buy more than they can pay for

Question 27

what is crowd funding?

Answer 27

Crowdfundingis an external source of finance that involves raising small amounts of money from a large number of people to fund a particular business project or venture.

This is typically done using online platforms.

Crowdfunding could be equity crowdfundingor donation-based crowdfunding

Question 28

what are the advantages of crowd funding?

Answer 28

It avoids the need for business to deal with commercial banks, which is often a time-consuming and a bureaucratic process.

Unlike business angels, individuals of the crowd do not take any controlling interest in the organization.

Crowdfunding is usually less costly than being listed on a public stock exchange.

Question 29

what are the disadvanates of crowd funding?

Answer 29

Theft of intellectual property is commonplace. Entrepreneurs are vulnerable to others stealing their business ideas, largely due to the absence of intellectual property protection. This is because of the lack of knowledge to defend these rights.

There are a lot of cases of crowdfunding scams. The loose regulatory requirements for crowdfunding in many parts of the world exposes investors to fraud.

Question 30

what is leasing?

Answer 30

It is a source of finance that allows a business to use an asset without having to purchase it.
A contract is agreed between a leasing company (the lessor) and the customer (the lessee) to hire the asset and pay in instalments (i.e. machinery, cars, buildings)

Leasing can be cheaper than buying the assets; so it helps the business in case they do not have initial cash to but assets upfront. However, sometimes the option of finance lease is available; where after a certain period of time (normally 3 years) the lessee can buy the asset.

Question 31

what is sale-and-leasback?

Answer 31

where a business sells a particular assets (to raise funds) but immediately leases it back

Question 32

what are the advantages of leasing?

Answer 32

The Business does not need to have a high initial capital to start up the business (they could just hire it at the beginning)
The lessor takes the responsibility of maintenance and repair of the asset
It is useful when particular times are required for short periods

Question 33

what are the disadvantages of leasing?

Answer 33

It can turn out to be more expensive in the long-run (accumulated total costs)
A leased asset cannot act as collateral in case the businesses needs another source of finance (i.e. loan)

Question 34

what is a business angle?

Answer 34

this are extremely wealthy individuals that choose to invest their own money in a business that shows growth potential . They will provide funds to business that:
Can’t have access to other types of funding but have potential to grow
Are too small to attract the attention of Venture capitalists

They can provide a one-off payment or continually support the start-up business. However, since the business is high-risk the Business angel will be extremely involved in the start-up business and hence the owner looses control (i.e. Sir Alan Sugar).

Question 35

what are the advantages of a business angle?

Answer 35

They give better terms and conditions to start-up businesses than other institutions
They also believe in the “person” they are investing in
They use all their expertise to help the start-up business be successful

Question 36

what are the disadvanages of a business angle?

Answer 36

They will assume a very high level of control of the business
The owner might want to buy the portion bought by the Business angel but they might not want to sell

Question 37

what is a microfincnace provider?

Answer 37

are for-profit social enterprises that offer financial and banking services to unemployed or very low income people.
These members of society would not ordinarily be able to secure bank loans.

Question 38

what is the aim of mircofinance?

Answer 38

The aim of providing microfinance is to help entrepreneurs, especially women, struggling to finance their business start-ups to gain access to loans of a small amount.
Microfinance can give these people the opportunity to become self-sufficient and empower them to run their businesses.
As with the majority of loans, interest is charged on the amount borrowed, although these are typically lower than what commercial banks would charge.

Question 39

what are some advanatges of Microfinance?

Answer 39

Microfinance can help many people to get out of poverty by making them become financially independent.

They help to empower entrepreneurs of small businesses, especially women and the underprivileged working and living in low-income countries.

Microfinance can help to build and foster a culture of entrepreneurial ship and economic independence.

Microfinance can create benefits for the wider community, such as improved healthcare, education, and employment opportunities.

Question 40

what are some disadvantages of microfiance?

Answer 40

Microfinance loans incur interest charges, so can be rather expensive for small business owners who find it difficult to earn enough revenue to keep up with their loan repayments.

Microfinance only provides finance on a small scale, so is unlikely to be sufficient to make a real difference to society as a whole.

Some people regard the practice of microfinance providers as being unethical as they earn profits from low-income individuals and households.

Question 41

what is short term finance?

Answer 41

Money required for the day-to-day running of a business. In case of external source of finance , this means anything that has to be repaid to creditors within a year (12 months or less). Examples include Overdrafts and Trade credit.

Question 42

what is log term finance?

Answer 42

Money used to purchase long-term fixed assets or to finance business expansions (capital expenditure). The period of the finance is more than 12 months; the longer the period , the harder it becomes to plan effectively. Examples range from long-term bank loans, share capital and Mortgages.

Question 43

Firms need to consider several factors which will influence their decision on what specific source of finance they will need, one of these is purpose to use the funds, what does this entail?

Answer 43

the purpose of the funds need to be decided before embarking of the source of Finance. Whether the business needs to purchase an asset or it needs the funds for day-to-day activities the business will then need to decide the appropriate source of finance (i.e. overdraft for a day-to-day activity, a long term loan to purchase new assets)

Question 44

Firms need to consider several factors which will influence their decision on what specific source of finance they will need, one of these is costs, what does this entail?

Answer 44

Businesses need to take all the costs of a source of finance into account. Such costs could be: interest payments, administrative costs, costs associated with the “sale of shares” (pay dividends).

Question 45

connected to cost is opportunity of cost, what does this entail?

Answer 45

Opportunity cost is the best alternative that is forgone after choosing one source over the other. Basically, what source of finance the firm will give-up to get another source.

Question 46

Firms need to consider several factors which will influence their decision on what specific source of finance they will need, one of these is status and size, what does this entail?

Answer 46

large organizations will have more access to finance than small organizations (like sole traders). That makes the decision on the source of finance more difficult.

Question 47

Firms need to consider several factors which will influence their decision on what specific source of finance they will need, one of these is amount required, what does this entail?

Answer 47

a long term loan might be needed for a large amount and an overdraft for a smaller one. Again, the business needs to know the amount required before embarking on a source of finance.

Question 48

Firms need to consider several factors which will influence their decision on what specific source of finance they will need, one of these is flexibility, what does it entail?

Answer 48

this refers to how easy a business can change from one source to another. Sometimes businesses might need more money that others. For example, businesses that depend on seasonal demand (i.e. swimming suits in summer)

Question 49

Firms need to consider several factors which will influence their decision on what specific source of finance they will need, one of these is state of the external environment, what does this entail?

Answer 49

this refers to factors that the business has no control of. For example, increase in interest rates or inflation (when things are more expensive people will demand less of the product). The business has to adapt to the situation and hence adapt the source of finance available.

Question 50

Firms need to consider several factors which will influence their decision on what specific source of finance they will need, one of these is gearing, what does it entail?

Answer 50

this refers to the long-term external borrowing of a firm as a percentage of its share capital.

a firm is said to be high geared if the proportion of loan capital the firms has is higher than its shared capital.

Firms with high gearing are relatively high risk as they have existing debts and are more vulnerable to any increase in interest rate.

Question 51

what is the difference between private limited companies and public companies when it comes to using share capital as a source of finance.

Answer 51

Private limited companies cannot sell shares to the general public, while public companies can sell their shares in the Stock exchange – which provides a market where shares and government stocks are bought and sold enabling companies to raise money (i.e. London Stock exchange – the oldest - New York, Tokyo, Nairobi stock exchanges)