3.2 sources of finance

Question 1

business angels

Answer 1

• they are 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

• 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, loan capital, share capital and business angels

Question 4

initial public funding (IPO)

Answer 4

• refers to a business converting its legal status to 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

• funds that are generated from within the organisation
• namely through personal funds, retained profits and the sales of assets

Question 6

leasing

Answer 6

• a form of hiring whereby a leases pays rental income to hire assets from the leaser
• from the legal owner of the assets

Question 7

loan capital (akak debt capital)

Answer 7

• refers to medium to long term sources of interest-bearing financed
• obtained from commercial lenders
• from mortgages, business development loans and debentures

Question 8

long term sources of finance

Answer 8

• those available for any period more than 12 months from the accounting period
• used for the purchase of fixed assets or ti finance the expansion of a business

Question 9

microfinance

Answer 9

• a type of financial service aimed at entrepreneurs of small businesses
• especially females and those on low incomes

Question 10

overdrafts

Answer 10

• allows 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

• a source of internal finance
• referring to the use of an entrepreneur’s own savings
• personal funds are usually used to finance business start-ups for sole traders

Question 12

retained profit

Answer 12

• 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

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• such as dormant assets (unused assets) and obsolete assets (outdated)

Question 14

share capital

Answer 14

• the money raised from selling shares
• in a limited liability company

Question 15

share issue (aka share placement)

Answer 15

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

Question 16

short term sources of finance

Answer 16

• those available for a period of less than one year
• used to pay for the daily or routine operations of the business
• such as overdraft or trade credit

Question 17

sources of finance

Answer 17

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

Question 18

stock exchange

Answer 18

• 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 - 60 days