5.1 Business finance: needs and sources

Question 1

The main factors in making the financial choice

Answer 1

purpose
availability - type/size of business
amount/ interest charge
time 
existing loans

Question 2

describe retained profit

Answer 2

profit after dividends and tax
😃no repaid
😡 new business wont have retained profits
😡 might too low to finance the expenses
😡 less payment to the owners

Question 3

describe trade credit

Answer 3

When businesses pay the cost of raw materials and their resources at a later date
😃 business has more days of having more money (increase in short-term finance)
😡 discount offered by the supplier for prompt payment will be lost
😡 Supplier may refuse further deliveries until outstanding payment has been made
😡 If delayed payment occurs too often, then the supplier may demand payment before delivery

Question 4

describe leasing

Answer 4

Monthly payment for an asset as firm cannot buy
Ownership remains with the leasing company

😃 Leasing company is responsible for maintenance/ repair
😃 Payment does not need to be payed immediately
Limitations
😡Business does not own the asset
😡Interest rates are higher than other finance options

Question 5

describe hire purchase:

Answer 5

business to obtain an asset over a period of time with monthly payment

😃 Cost is spread over time
😡 Repair/maintenance is financed by the business
😡 Interest rates are higher than other finance options

Question 6

describe Debentures

Answer 6

Long term loan certificates issued by limited companies
25 years+

😡 interest must be paid
😡 Security or collateral is required

Question 7

describe factoring of debts

Answer 7

A specialist agent buys the claims on debtors (people who owe the business money) giving the business immediate cash
😃 Immediate cash
😃Saves time and resources
😃Fress ongoing working capital
😃Better customer management

😡Loses money
😡The collection of debt becomes the problem of the factor and not business