5.3 Making financial decisions: sources of finance

Question 1

External sources of finance

Answer 1

• Equity
• Loans
• Venture capital
• Mortgages
• Crowdfunding

Question 2

Internal sources of finance

Answer 2

• Retained profits
• Sale of assets

Question 3

Short-term sources of finance

Answer 3

• Overdraft
• Debt factoring
• Trade credit

Question 4

Advantages and disadvantages of Retained profit

Answer 4

Advantages:
- No interest to pay
- Does not have to be paid back
- No dilution of shares

Disadvantages:
- Shareholders may have reduced dividends

Question 5

Advantages and disadvantages of Sale of assets

Answer 5

Advantages:
- No interest to pay
- Does not have to be paid back
- No dilution of shares

Disadvantages:
- Once sold it is gone forever

Question 6

Advantages and disadvantages of Equity

Answer 6

Advantages:
- No interest to pay
- Does not have to be paid back

Disadvantages:
- Might upset existing shareholders

Question 7

Advantages and disadvantages of Loans

Answer 7

Advantages:
- No dilution of shares

Disadvantages:
- Interest payments
- Set maturity date

Question 8

Advantages and disadvantages of Overdrafts

Answer 8

Advantages:
- Quick and easy to set up and very flexible
- Interest paid only on amount overdrawn

Disadvantages:
- Interest payments higher than for a loan

Question 9

Advantages and disadvantages of Debt factoring

Answer 9

Advantages:
- Immediate cash
- improves cash flow
- Protection from bad debts - reduced administration costs

Disadvantages:
- Expensive
- Customer relations may be affected

Question 10

Advantages and disadvantages of Trade credit

Answer 10

Advantages:
- Eases cash flow

Disadvantages:
- if late paying, can damage credit history