3.2 sources of finance

Question 1

internal source of finance

Answer 1

Money for a business that is raised from the business’s or owner’s existing assets. using money that was already previously owned.

Question 2

3 main internal sources of finance

Answer 2

personal funds
retained profits
sale of assets

Question 3

personal funds

Answer 3

refer to money invested by the owner or owners of a business.
This investment comes with a risk for the owner: if the business goes bankrupt, the money will be lost.

Question 4

recessions

Answer 4

A period when GDP decreases for two or more successive quarters (three-month periods).

Question 5

retained profit

Answer 5

Money that a company has left at the end of the trading year after paying all costs, expenses, dividends and taxes.
It is the primary source of finance for all businesses.

Question 6

disadvantage of retained profit

Answer 6

that it may take many years before the funds are in place. Another disadvantage associated with using retained profits is the loss of dividends

Question 6

advantage of retained profit

Answer 6

hey do not have to be repaid

Question 7

why is retained profit contriversial?

Answer 7

Some people see these cash reserves as an indication that the companies are not distributing value among stakeholders. Others would like to see the money used to develop the business further.

Question 8

sale of assets

Answer 8

Fixed assets usually generate income for the company. They can be tangible, such as land, building or machinery. Or they can be intangible, such as patents or brand names.

Question 9

opportunity cost

Answer 9

The potential cost of missing an opportunity by choosing one option and foregoing another.

Question 10

short term sources of finance

Answer 10

repaid within less than a year
. These are normally used to solve cash flow problems or to pay for revenue expenditure

Question 11

when is selling assets apropriate

Answer 11

Selling assets may be appropriate if a business changes its objectives and needs money to invest in a new strategy.

Question 12

medium term sources of finance

Answer 12

longer than a year but less than 5
The most commonly used medium-term source of finance is a bank loan.

Question 13

long term sources of finance

Answer 13

longer than 5 years

Question 14

personal funds characteristics

Answer 14

long,medium and short term
opportunity cost- other actions could have been funded with money
no loss of control
suitable for small businesses without large funding needs

Question 15

retained profits characteristics

Answer 15

long medium and short term
opportunity cost- loss of dividens to shareholder
no loss of control
all businesses benefit

Question 16

sale of assets characteristics

Answer 16

opportunity cost- loss of ability to use assests for production
no loss of control
all busineses benefits

Question 17

groups of external sources of finance

Answer 17

equity finance
debt finance
other sources of finance

Question 17

external sources of finance

Answer 17

Money for a business that is raised from outside the business, such a bank loan.

Question 18

share capital external source

Answer 18

Finance for a business that is raised through the issue of shares to new investors on a stock market.

Question 19

pros and cons of share capital + term

Answer 19

pro- large sums are generates, good for big companies’
cons- reduce control, not suitable for private and small companies
long term

Question 20

business angels external source

Answer 20

A wealthy business person who invests their money into new businesses.

Question 21

pros and cons of business angels + term

Answer 21

pro- provides funding for businesses not listed in stock, very early finance to new business, offer skills and mentor, good for small companies
con0 take parts of profit, loss of control, conflict between angel and owner
long term

Question 22

Loan capital external source

Answer 22

is a medium or long-term source of finance, often used to buy fixed assets. A mortgage is a special type of long-term loan that is used to purchase land or buildings.

Question 23

loan capital pros and cons + term

Answer 23

pro- money available imediatley
con- small businesses dont have collateral so it is difficult to loan
long term

Question 24

overdrafts external source

Answer 24

A high-cost, short-term loan attached to a bank account; allows the account holder to withdraw an amount of money that is greater than the amount they currently hold.

Question 25

overdraft pros and cons

Answer 25

pro- fast access to money and enable to meet day to day expenses
con- overdraft allowence is limited, expensive form of borrowing

Question 26

microfinance providers external source

Answer 26

Financial services provided to individuals who have very limited income and assets and are not able to get services from traditional banks.

Question 27

microfinance provider pros and cons+ term

Answer 27

pro- dont require collateral, secure loan
cons- small loans, interest rate is high
short term

Question 28

crowdfunding external source+ types of crowd funding

Answer 28

A form of finance where many people, perhaps thousands, invest small amounts of money to fund a business or project.

Peer-to -peer lending: many investors providing a loan that earns interest

Equity crowdfunding: many investors acquire a small share of ownership in the business

Rewards-based crowdfunding- many investors receive non-financial reward at a later date like product or service

Donation bases crowd funding- the participants are doners and don’t receve anything

Question 29

pros and cons of crowd funding+ term

Answer 29

easy to happen, fast
needs platform, can loose power
short and medium term

Question 30

leasing external source

Answer 30

A business renting (hiring) a fixed asset over a period of time, rather than buying it.

Question 31

leasing pros and cons + term

Answer 31

-pro: use assets without having to fully finance it up front, businesses can always return assests for latest model, businesses doesnt need to worry about maintaining or repairing equipment, lower costs
-con: business doesnt own asset
short and medium term

Question 32

trade credit external finance

Answer 32

A type of external finance whereby a business receives products from a supplier immediately, but pays for them at a later date.

Question 33

trade credit pros and cons + term

Answer 33

pro- more time to pay using profits from products
short term

Question 34

howto evaluate source of finance

Answer 34

consider:
type and size of business
purpose of business and objectives
risk tollerance of the business