3.2

Question 1

Sources of finance

Answer 1

Ways in which a business can raise or obtain money

Question 2

Internal sources of finance

Answer 2

Funds which come from within the business, that is generated by the business
personal funds
retained profit
sale of assets

Question 3

External sources of finance

Answer 3

Funds which come from outside the business
share capital
loan capital
overdrafts
trade credit
leasing
business angel
crowdfunding
microfinance providers

Question 4

personal funds

Answer 4

owners put their own savings into the company
usually startup for sole traders
P: no interest payments or loss of control
C: may not have personal funds

Question 5

Sale of Assets

Answer 5

Selling items that belong to the business
e.g. land, machines
P: Gain a one off payment
C: Might be future costs involved - e.g. rent

Question 6

Retained Profit

Answer 6

A company may make a profit. This is then either:-
paid to shareholders
retained - put back into the business
P: Using money the business has earned
C: Shareholders may sell your shares if you don’t pay large enough dividends

Question 7

Share Capital

Answer 7

Selling part of the business to an investor in return for finance
Limited liability company
P: Doesn’t need to be repaid
C: Give up some ownership and control

Question 8

Business Angels

Answer 8

Wealthy individuals who invest in small businesses
Pros/cons same as above and…
P: gain knowledge & experience, connections
C: May have short to medium term profit expectations

Question 9

Loan Capital

Answer 9

Borrow money (usually from bank)
P: Do not give up control of the business
C: Have to pay back with interest

Question 10

Overdraft

Answer 10

Banks allows the business’s account to go negative
P: Very flexible and short term
C: Can be high rates of interest

Question 11

Trade Credit

Answer 11

When businesses buy inputs from other businesses
30-90 days - ‘Buy now, pay later’
P: interest free
C: cannot be paid early if discount is offered

Question 12

Microfinance Provider

Answer 12

Providing small loans to businesses/entrepreneurs who might be able to borrow elsewhere
Often in LDCs to help entrepreneurs
P: Can get access to finance
C: Small amounts and seen by some as unethical

Question 13

Leasing

Answer 13

Paying for the use of an asset for a period of time e.g. machinery, car
P: Do not need to pay upfront for the asset
C: Likely to be more expensive in the long run

Question 14

Crowdfunding

Answer 14

When many people invest small amounts of money into the business
This can take many forms:
Donations
Equity
Peer-to-peer lending
P: Use of large numbers
C: Investors will also expect some sort of reward

Question 15

Factors to consider for appropriateness of short or long term sources of finance

Answer 15

Time period
Amount needed
Cost involved
Legal Structure
Size of existing borrowing
Attitude to ownership and control

Question 16

Factors to Consider - Time Period:

Answer 16

short term lack of cash - overdraft, trade credit
long term investment - loan or shares

Question 17

Factors to Consider - Amount needed:

Answer 17

share capital can raise millions
harder to raise a large amount in a short period of time

Question 18

Factors to Consider - Cost involved:

Answer 18

Look at interest rates for loans
IPO can cost million in legal/consulting fees etc.

Question 19

Factors to Consider - Legal Structure:

Answer 19

sole trader and partnership cannot issue shares

Question 20

Factors to Consider - Size of existing borrowing:

Answer 20

Already high debt limits future borrowing

Question 21

Factors to Consider - Attitude to ownership and control:

Answer 21

Equity financing requires giving up some control

Question 22

Pros of loan capital

Answer 22

no loss of control
no sharing of profits
temporary as loan is paid back
good in long term as don’t lose any control of the business

Question 23

Pros of share capital

Answer 23

No borrowing – never have to pay it back
no interest payments
More flexible – don’t have to make dividend payments every year
Good in short term – can risk other peoples money to grow the business