5.2 Sources of Finance

Question 1

Why is an overdraft a short term source of finance?

Answer 1

Due to the high daily interest charges.

Question 2

Is interest usually charged when trade credit is given?

Answer 2

No

Question 3

Define retained profit.

Answer 3

Profit made by the business but kept back for its own use. Not paid to owners/shareholders.

Question 4

Which source of finance are sole traders and partnerships not able to use?

Answer 4

Share issue.

Question 5

Define interest.

Answer 5

An amount of money that must be paid back in addition to the amount borrowed.

Question 6

Describe the difference between internal and external finance.

Answer 6

Internal comes from within the business, whereas external comes from outside of the business.

Question 7

True or false - Sale of assets has no disadvantages.

Answer 7

False - if demand increases the assets may have to be bought again at full price.

Question 8

List two advantages of internal finance.

Answer 8

Normally no cost to the business. Quick to organise.

Question 9

Define security.

Answer 9

Something of value which is offered to the lender as a form of guarantee of payment.

Question 10

Does a grant have to be repaid?

Answer 10

No, not usually.

Question 11

State 3 reasons why businesses need finance.

Answer 11

Start up. 
Growth/expansion.
Day-to-day running costs. 
Buy new equipment.
develop and fund marketing campaigns.

Question 12

True or false - a mortgage is a short term source of finance .

Answer 12

False - mortgages are usually for 25-30 years.

Question 13

What is trade credit used to buy?

Answer 13

Stocks, materials.

Question 14

True or false - banks may be reluctant to give a loan to a business with a poor financial record.

Answer 14

True

Question 15

List two disadvantages of external finance.

Answer 15

There is normally a cost, such as interest. Security may be required.
Control may be lost.

Question 16

State three methods of external finance

Answer 16

Loan
Overdraft
Trade credit
Share issue
Crowdfunding
New partner

Question 17

What is an overdraft?

Answer 17

An agreement with the bank that a business can spend more money than it has in its account.

Question 18

What is trade credit?

Answer 18

When a business buys stock from a supplier but is given 30, 60 or 90 days to pay.

Question 19

Define owners’ capital.

Answer 19

Money from the owners personal savings invested into the business.

Question 20

What is meant by ‘taking on a new partner’?

Answer 20

Adding a new partner into the business who brings capital as well as skill and expertise.

Question 21

Define share issue.

Answer 21

Raising money from investors by selling new shares.

Question 22

Define crowdfunding.

Answer 22

Money raised through an appeal to the public.

Question 23

Which source of finance is not available to limited companies?

Answer 23

Taking on a new partner.

Question 24

State two advantages of using owners’ capital.

Answer 24

No need to repay.

No interest to be paid.

Question 25

State one disadvantage of using owners’ capital.

Answer 25

None left for the owner in case of emergency.

Might not be enough.

Question 26

State two advantages of using retained profit.

Answer 26

No interest to be paid.

No need to repay.

Question 27

State one disadvantage of using retained profit.

Answer 27

Only available to businesses that have made a profit.

It may not be enough.

Question 28

State two advantages of using sale of assets.

Answer 28

No repayment.

No interest.

Question 29

State two disadvantages of using sale of assets.

Answer 29

Can take time to sell the asset.
May not be possible to find a buyer.
If demand increases the asset may need to be bought again at full cost.

Question 30

State two advantages of an overdraft.

Answer 30

Meets short term cash flow problems.
Business can continue trading short term.
Only charged interest on the amount used.

Question 31

State one disadvantage of an overdraft.

Answer 31

High interest can be expensive.

Question 32

State two advantages of a trade credit.

Answer 32

Goods can be sold before payment for them is made.
Helps with short term cash flow problems.
Usually interest free.

Question 33

State two disadvantages of a trade credit.

Answer 33

The goods must be paid for, even if they do not sell.

Interest may be charged if the credit is not repaid within the agreed time limit.

Question 34

State two advantages of taking on a new partner.

Answer 34

May bring skills to the business.

No cost or repayment.

Question 35

State two disadvantages of taking on a new partner.

Answer 35

The new partner will have a running in the say of the business.
Profits must be shared with the new partner.

Question 36

State two advantages of using a loan.

Answer 36

Repayment is spread over time.

Fixed repayments helps with budgeting.

Question 37

State two disadvantages of using a loan.

Answer 37

Interest to be paid.

May need to risk an asset as security.

Question 38

State two advantages of share issue.

Answer 38

A lot of finance can be raised.
Money does not have to be paid back.
No interest payable.

Question 39

State two disadvantages of share issue.

Answer 39

Dividends have to be paid.
Shareholders entitled to a say in the running of the business through votes at the AGM.
The business may be taken over.

Question 40

State two advantages of crowdfunding.

Answer 40

A lot of money can be raised.
Good for start-up or expansion.
No security is needed.

Question 41

State two disadvantages of crowdfunding.

Answer 41

Interest may need to be paid if it is loaned rather than donated.
Profits may need to be shared if equities are sold (part ownership).

Question 42

What is crowdfunding?

Answer 42

Money raised from sponsors who can either donate, lend or become part-owner.

Question 43

Define loan

Answer 43

A sum of money borrowed for a certain period of time at an agreed rate of interest.