BS5- Sourcesof Finace

Question 1

What is factoring?

Answer 1

It is a short term source of finance for day to day trading of the business
A source of finance where a business receives a proportion of the amount owned by trade debtors from a specialist finance provider.

Question 2

What are the benefits and drawbacks of using factoring?

Answer 2

Benefits- it is seen as a cost effective method
It can protect you from bad debts

Drawbacks- it reduces the profit margin
Reduces the scope for other borrowing

Question 3

What is hire purchase?

Answer 3

Where a business has the use of an item whilst paying for it in regular installments.

Question 4

What are the benefits and drawbacks of using hire purchase?

Answer 4

Benefits- simple to apply
Fixed interest rate
Spread cost over number of years

Drawbacks- higher total cost
Can be repossessed if you don’t make a payment
Contract terms can be quite long

Question 5

Define trade credit?

Answer 5

Trade credit is the loan extended by one trader to another when the goods and services are bought on credit.

Question 6

What are the benefits and drawbacks of using trade credit?

Answer 6

Benefits- access to supplies without immediate payment
- no interest

Drawbacks- short term, must be paid off quickly
-Usually small amounts

Question 7

What is overdraft?

Answer 7

An overdraft occurs when money is withdrawn in excess of what is on the current account.

Question 8

What are the benefits and drawbacks of using overdraft?

Answer 8

Benefits- quick access
- allows emergency purchases

Drawbacks- high interest rates
-is only a short term solution

Question 9

What is the difference between debt and equity finance?

Answer 9

Debt financing involves the borrowing of money whereas equity financing involves selling a portion of equity in the company

Question 10

What are debentures?

Answer 10

a debenture is a medium- to long-term debt instrument used by large companies to borrow money, at a fixed rate of interest.

Question 11

What is leasing?

Answer 11

A lease is a contractual arrangement calling for the user to pay the owner for use of an asset

Question 12

What are the benefits and drawbacks of leasing?

Answer 12

Benefits- no large upfront payments
-leasing company may be responsible for repairs and maintenance

Drawbacks- over time it can be a more expensive way to obtain assets
-assets aren’t owned by the business

Question 13

What is working capital and how is it calculated?

Answer 13

the capital of a business which is used in its day-to-day trading operations, calculated as the current assets minus the current liabilities.
Working capitals current assests- current liabilities

Question 14

What is retained profit?

Answer 14

Retained profit is the amount of a business’s net income that is kept within its accounts, rather than paid out to shareholders.

Question 15

What are the benefits and drawbacks of using retained profits?

Answer 15

Benefits-quick and convenient

• easy access to the money
• no interest payments to make

Drawbacks- once the money is gone, it is not available for any future unforeseen problems the business might face

Question 16

What are the benefits and drawbacks of a bank loan?

Answer 16

Benefits- easy and quick to access
-can get a significant amount of money at one time

Drawbacks-have to pay interest
-difficult for a new business to access

Question 17

What are venture capitalists?

Answer 17

Venture capital is a form of private equity financing that is provided by venture capital firms or funds to startups, early-stage, and emerging companies that have been deemed to have high growth potential or which have demonstrated high growth.

Question 18

What are business angels and how do the differ from venture capitalists?

Answer 18

Business angels are individuals, often successful business people, who are using their own funds to invest in businesses they like, whereas venture capitalists manage the pooled money of others in a professionally-managed fund.

Question 19

What can a business choice of finance depend on?

Answer 19

• Purpose of finance.
• Cost of finance.
• Duration of finance.
• Required amount of finance.
• Type of the business organization.
• Size and status of the business.
• Gearing level.
• Flexibility.

Question 20

How might the government assist a business financially?

Answer 20

The government can offer a grant which doesn’t need to be payed back and is given to the business