6.1 Sources of Finance

Question 1

Bank loan

Answer 1

An amount of money borrowed for a set period of time with an agreed repayment schedule which includes interest

Question 2

Share issue

Answer 2

Finance raised through sales of shares either privately or on a stock exchange

Question 3

Overdraft

Answer 3

An agreement with the bank to overspend on an account up to an agreed limit

Question 4

Retained profit

Answer 4

Funds kept within a business for reinvestment and growth rather than given to shareholders as dividends.

Question 5

Trade credit

Answer 5

A supplier provides goods to a business but is willing to wait for payment until a later date

Question 6

Sale of assets

Answer 6

Selling items of value that are no longer needed by the business, such as spare land.

Question 7

Examples of trade credit

Answer 7

Currys PC World: most of the items on its shelves aren’t yet paid for because they’re paid back within an agreed time period

Question 8

Internal sources of finance

Answer 8

Mainly available from within the business, though there’s a very limited amount of internal sources. Some examples are a business’ retained profits and sales of its assets like vehicles or warehouses

Question 9

External sources of finance

Answer 9

Money that is raised from outside the business. External sources of finance enable businesses to access larger amounts of money than may be available from internal sources. Some examples are bank loans, overdrafts, share issue and trade credit

Question 10

Inventories

Answer 10

Raw materials that have not yet been used or products that have been made, but not yet sold. Also known as stocks.

Question 11

Owners’ equity

Answer 11

Money put into a business by its owner or owners.

Question 12

Interest

Answer 12

Payment made in order to borrow money. It means you always pay back more than you borrrow.

Question 13

Shareholder

Answer 13

A person or organisation that owns part of a company. Each shareholder “holds shares” of the business, granting executive authority, such as the ability to make impactful business decisions.

Question 14

Asset

Answer 14

Something that is owned by a business. For example land, vehicles, machinery and buildings.

Question 15

Collateral

Answer 15

An asset that a bank holds as security for the repayment of the loan.

Question 16

Mortgages

Answer 16

Loans from banks and building societies that are used to buy land and buildings, such as offices and shops.

Question 17

Building societies

Answer 17

Organisations that offer a range of financial services. However, their major business is providing savings accounts and lending money for the purpose of buying property.

Question 18

Venture capitalists

Answer 18

People who are willing to spend money for a percentage of a company. The money they spend is an investment because they see that your company has high growth potential. An example of a venture capitalist is a “dragon” from “dragon’s den”. You can negotiate percentages for the business depending on various factors.