3.2 Sources of Finance

Question 1

internal sources of finance

Answer 1

money raised from a business/ owner’s existing assets

(money business or owner previously earned)

Question 2

three main internal sources of finance

Answer 2

personal funds

retained profit

sale of assets

Question 3

personal funds

Answer 3

money invested by the owner of a business

Question 4

benefits for shares of a business

Answer 4

1. right to future dividends
2. power to make business decisions

Question 5

Retained Profit

Answer 5

aka accumulated profit

money company has left at the end of the trading period after all costs, expenses, dividends and taxes

Question 6

disadvantages for retained profit

Answer 6

may take years before funds accumulate and are sufficient

loss of dividends

Question 7

advantage for retained profit

Answer 7

doesn’t have to be repaid

Question 8

personal funds advantages

Answer 8

doesn’t have to be repaid

owners receive shares in return for their investment

Question 9

personal funds disadvantages

Answer 9

may be lost in case of bankruptcy

Question 10

sale of assets

Answer 10

selling something a business owns (asset)

tangible (ie land, machinery) or intangible (ie patents, brand names)

Question 11

opportunity costs

Answer 11

potential cost of missing an opportunity by choosing an option over another

(good to update technology; sell old, buy new)
(good when business changes objectives)

Question 12

short-term sources of finance

Answer 12

repaid within 12 months

Question 13

medium-term sources of finance

Answer 13

longer than one year but less than 5 years

(ie bank loan, leasing and subsidies)

Question 14

long-term sources of finance

Answer 14

longer than 5 years

(ie equity finance, mortgages)

Question 15

characteristics of personal funds (length, costs, loss of control, suitable for:)

Answer 15

long, medium and short-term finance

opportunity cost

no loss of control

small businesses with large funding needs

Question 16

characteristics of retained profit (length, costs, loss of control, suitable for:)

Answer 16

long, medium, and short-term

opportunity costs.
Loss of dividends to shareholders.

no loss of control.

all businesses.

Question 17

characteristics of sale of assets (length, costs, loss of control, suitable for:)

Answer 17

depends on size of asset

opportunity cost

no loss of control

potentially all businesses

Question 18

external sources of finance

Answer 18

equity finance

debt finance

(other)

Question 19

equity finance

Answer 19

provider receives part ownership of the business in exchange for the finance

Question 20

equity finance advantages

Answer 20

no repayments, no interest

risks associated are shared among many owners

Question 21

equity finance disadvantages

Answer 21

loss of control

loss of a portion of future dividends

Question 22

three types of equity finance

Answer 22

business angel

venture capital

share capital

Question 23

business angel

Answer 23

successful, wealthy business person who invests their money into new businesses

private individuals who risk their own money

(very early finance)

in return for their investment and guidance, they require part ownership of the business and a portion of future profits

seek high growth and large returns on investment – mentor entrepreneurs (expertise and contacts)

Question 23

disadvantage of business angels

Answer 23

the BA might want the business to be set up or grown differently from the entrepreneur

the BA and the entrepreneur must share the same values and objectives

Question 24

venture capital

Answer 24

pools resources from a group of investors to fund a new business venture capitalists are companies which use the money from their clients to fund investments aim: help business grow so that the investors can later sell their stake at a higher price

Question 25

share capital

Answer 25

money raised through the issue of shares to new investors on a stock market (in an IPO, the business becomes a public limited company -- shareholders receive a portion of profits (dividends))

Question 26

Debt finance

Answer 26

money borrowed from a bank (or other financial institution) interest rate payed to the lender

Question 27

forms of debt finance

Answer 27

loan capital overdrafts microfinance trade credit

Question 28

loan capital

Answer 28

financing borrowed by a business from a financial institution, to be repaid with interest

Question 29

loan

Answer 29

medium or long-term source of finance (usually used to buy fixed assets)

Question 30

mortgage

Answer 30

type of long-term loan used to purchase lands or buildings

Question 31

collteral

Answer 31

asset offered to a lender in the event that the business doesn't repay the loan

Question 32

advantage of loan capital

Answer 32

money available immediately repaid in small chunks, over a period of years

Question 33

overdrafts

Answer 33

high-cost, short-term loan attached to a bank account (account holder can withdraw an amount of money that is greater than they currently hold) very high interest rate

Question 34

microfinance

Answer 34

providing financial services to individuals who have limited income and assets and cannot get money from the bank

Question 35

microcredit

Answer 35

subset of microfinance small loans that enable someone to start or continue to finance a small-scale business no collateral short loan period high interest rate

Question 36

trade credit

Answer 36

receiving goods and services from a supplier immediately, but paying it back at a later date no interest

Question 37

leasing

Answer 37

renting a fixing asset over a period of time, instead of buying it

Question 38

advantages to leasing

Answer 38

can use an asset without having to fully finance it can lease the latest model and return the asset when the business no longer needs it no worry about maintaining or repairing the equipment -- lowers costs

Question 39

crowdfunding

Answer 39

many people invest small amounts of money to fund a project/ business

Question 40

peer-to-peer lending (crowdfunding)

Answer 40

many investors provide a loan that earns interest

Question 41

equity crowdfunding

Answer 41

many investors acquire a small share of ownership in the business

Question 42

rewards-based crowdfunding

Answer 42

many investors receive non-financial reward at a later date, ex. good or service produced by a business

Question 43

donation-based crowdfunding

Answer 43

participants are donors rather than investors and don't receive anything in return

Question 44

types of crowdfunding

Answer 44

peer-to-peer equity rewards-based donation-based

Question 45

patient capital

Answer 45

long-term financing where investors wait longer to see returns and expect a fair return

Question 46

loan capital advantage

Answer 46

no loss of ownership and control of business

Question 47

loan capital disadvantage

Answer 47

burden of repaying is more concentrated larger risks interest -- loan can be more expensive