3.2 - Sources of finance

Question 1

Business angels

Answer 1

Extremely wealthy individuals who risk their own money by investing in small to medium sized businesses that have high growth potential

Question 2

Crowdfunding

Answer 2

Is the practice of raising finance for a business venture or project by getting small amounts of money from a large number of people, usually through online platforms

Question 3

External sources of finance

Answer 3

The funds from outside of the organisation, such as through debt (overdrafts and loan-capital), share capital and business angels

Question 4

IPO

Answer 4

Refers to a business converting its legal status to a publicly traded company by floating (or selling) its shares on a stock exchange for the first time.

Question 5

Internal sources of finance

Answer 5

Are funds generated from within the organisation, namely through personal funds, retained from profits and the sale of assets.

Question 6

Leasing

Answer 6

Is a form of hiring whereby lesees pay rental income to hire assets from the lessor, the legal owner of the assets.

Question 7

Loan Capital (or debt capital)

Answer 7

Refers to medium-long term sources of interest-bearing finance obtained from commercial lenders. Examples include mortgages, business development loans and debentures.

Question 8

Long-term sources of finance

Answer 8

Those available for any period of more than 12 months from the accounting period used for the purchase of fixed assets or to finance the expansion of a business.

Question 9

Microfinance

Answer 9

Is a type of financial service aimed at entrepreneurs of small businesses, especially females and those on low incomes (from Social enterprises)

Question 10

Overdrafts

Answer 10

Allow a business to spend in excess of the amount in its bank account, up to a pre-determined limit. They are the most flexible form of borrowing for most businesses in the short term.

Question 11

Personal funds

Answer 11

Are a source of internal finance, referring to the use of an entrepreneurs own savings. Personal funds are usually used to finance business start-ups for sole traders.

Question 12

Retained profit

Answer 12

Is the value of the surplus that a business keeps to use within the business after paying corporate taxes on its profits to the government and dividend payments to its shareholders.

Question 13

Sale of assets

Answer 13

Means selling existing items of value that the business owns, such as dormant assets (unused assets) and obsolete assets (outdated assets).

Question 14

Share capital

Answer 14

Is the money raised from selling shares in a limited liability company.

Question 15

Share issue (or share placement)

Answer 15

Means an existing publicly held company raises further finance by selling more of its shares.

Question 16

Short-term sources of finance

Answer 16

Are those available for a period of less than one year, used to pay for the daily or routine operations of the business, such as overdrafts and trade credit.

Question 17

Sources of finance

Answer 17

Is the general term used to refer to where or how businesses obtain their funds, such as from personal funds, retained profits, loan capital and share capital.

Question 18

A Stock Exchange

Answer 18

Is a highly regulated marketplace where individuals and businesses can buy and/or sell shares in publicly traded companies.

Question 19

Trade credit

Answer 19

Allows a business to postpone payments or to ‘buy now and pay later’. The credit provider does not receive any cash from the buyer until a later date (usually allow between 30 and 60 days).