3.6.1

Question 1

what are the different sources of finance?

Answer 1

-investors
-loans
-family and friends

Question 2

what are the different ways of getting finance?

Answer 2

-retained profit
-selling assets
-bank loans or mortgages
-share issue
-government grant
-over draft
-trade credit
-hire purchase

Question 3

what is retained profit?

Answer 3

part of a businesses annual profit which is kept within the business

Question 4

advantages of retained profit

Answer 4

-no interest payments
-can be arranged immediately
-no need to repay money

Question 5

disadvantages of retained profit

Answer 5

-only available to profitable businesses
-shareholders may ppose the decision

Question 6

what is selling assets?

Answer 6

fixed assets, such as machinery or premises that the business owns, is sold

Question 7

advantages of selling assets

Answer 7

-good if the asset is no longer of use to the business
-no interest payments
-may keep assets (leased back)

Question 8

disadvantages of selling assets

Answer 8

-can take time
-may not be possible to find a buyer
-many businesses do not have suitable assets

Question 9

what are bank loans or mortgages?

Answer 9

amount of money borrowed from a bank or other lender usually for a stated purpose

Question 10

advantages of bank loans or mortgages

Answer 10

-repayment is spread overtime
-can be arranged quickly
-business knows amount to be paid in installments

Question 11

disadvantages of bank loans or mortgages

Answer 11

-interest has to be paid
-banks may require an asset as collateral

Question 12

what is share issue?

Answer 12

new shares are sold, raising money for the business

Question 13

advantages of share issue

Answer 13

-no interest payments
-money does not have to be repaid
-a lot of finance can be raised from many investors

Question 14

disadvantages of share issue

Answer 14

-owners may lose control of company
-only available to companies
-dividends may have to be paid on the shares to shareholders

Question 15

what is a government grant?

Answer 15

sum of money given by the government

Question 16

advantages of a government grant

Answer 16

-many government grants do not hae to be repaid

Question 17

disadvantages of a government grant

Answer 17

-business may have to meet strict conditions to receive grant
-businesses may have to invest money alongside the grant

Question 18

what is an overdraft?

Answer 18

arrangement with a bank that a business can spend more money that it has in its’ bank account

Question 19

advantages of an overdraft

Answer 19

-meets short term cash flow problems
-businesses can continue trading in the short term
-interest is paid only on amount borrowed

Question 20

disadvantages of an overdraft

Answer 20

-can be expensive

Question 21

what is trade credit?

Answer 21

does not need to pay supplier for goods for a period of time

Question 22

advantages of trade credit

Answer 22

-helps businesses with temporary cash flow problems
-periods of credit is usually interest free

Question 23

disadvantages of trade credit

Answer 23

-goods must be paid for even if they do not sell
-interest is charged if the credit is not repaid within the time limit

Question 24

what is a hire purchase?

Answer 24

businesses pay for assets, such as vehicles and paying in instalments over a period of time

Question 25

advantages of a hire purchase

Answer 25

-spread the cost

Question 26

disadvantages of a hire purchase

Answer 26

-can be very expensive
-business will not own the item until it’s completely paid
-business will not be able to raise large amounts of money from this source

Question 27

what to consider when choosing an appropriate source of finance for a new business?

Answer 27

-amount of personal finance available
-legal structure of the business
-how risky the business is judged to be

Question 28

what to consider when choosing an appropriate source of finance for an established business?

Answer 28

-profitability of business
-assets owned by the business
-past history + future prospects
-legal structure
-amount of finance needed