btec business 2

Question 1

Why do businesses need finance?

Answer 1

Fund capital and revenue expenditure

Question 2

What determines the source of finance used?

Answer 2

What it is being used for
The type of business it is
How much needs to be borrowed and for how long

Question 3

What is short term finance?

Answer 3

Paid back within a year

Question 4

What is long term finance?

Answer 4

Paid back in a period great than one year

Question 5

What are the internal sources of finance?

Answer 5

Retained profit, Net current assets and Sales of assets

Question 6

What is retained profit?

Answer 6

Profit kept in the business to fund future
expenditure. Profits that are kept within the
business and not distributed to the owners or shareholders.

(profit = sales revenue – total costs)

Question 7

What are Net current assets?

Answer 7

Current assets – current liabilities
Shows money available in the business to fund day to day expenditure

Question 8

What is sale of assets?

Answer 8

Selling an item of worth owned by the business in order to achieve an immediate cash injection

Question 9

Outline the advantages and disadvantages of retained profit

Answer 9

+ No interest charges
Available immediately
Available up to the amount already accumulated, therefore avoids debt
No loss of ownership (control)
- Amount available may be limited
Reduces payments to shareholders which may cause dissatisfaction
Once used it is not available for alternative purposes

Question 10

Outline the advantages and disadvantages of Net current assets

Answer 10

+ Encourages the business to manage cash flow effectively
-Can put pressure on customers as shorter credit terms are offered and this negatively affects relationships with suppliers if longer credit terms are negotiated
Lower stock holdings can affect the firm’s ability to meet customer needs

Question 11

Outline the advantages and disadvantages of sale of assets

Answer 11

+No interest charges
Reduces capital tied up in assets, releasing it for other purposes
Can mean disposing of an asset no longer of use to the business
- It is likely that the amount received is not a true reflection of the value of the asset
Can increase costs in the long run if an asset needs to be leased back

Question 12

What is meant by external sources of finance?

Answer 12

Available from outside the business

Question 13

List the external sources of finance

Answer 13

Owners capital
Loans
Crowdfunding
Mortgages
Venture capital
Debt factoring
Hire purchase
Leasing
Tarde credit
Grants
Donations
Peer to peer lending
Invoice discounting

Question 14

Why are internal sources of finance not available to new and small businesses?

Answer 14

New and small businesses have not been running for long enough to have much retained profit.

Question 15

Explain owner’s capital

Answer 15

It’s a long-term option, with few additional costs, where the investors put more of their personal savings into the business.
(long-term)

Question 16

What is a loan?

Answer 16

This is money borrowed at an agreed rate of interest from a financial institution
For a specific purpose and set period of time
(long-term source of finance)

Question 17

What does hire purchase allow a business to do?

Answer 17

Allows the business to obtain assets by paying a deposit then making regular payments.
Remains the property of the seller until final instalment is made
(medium-term source of finance)

Question 18

What is meant by leasing?

Answer 18

Paying for the use of an asset in instalments over the length of its useful life
Ownership stays with the supplier through =out the length of the leese

Question 19

What does crowd-funding involve?

Answer 19

Attracting investment from many possible
investors
It involves raising funds online by asking people to
invest a small amount of money each.
(short-term source of finance)

Question 20

What is debt factoring?

Answer 20

When you sell a business’s invoice to a third party.
The debtor owes money to the factor agency and they will pursue payment.
(short-term funding)

Question 21

Explain venture capital

Answer 21

Funds from a professional investor in return for a share of the ownership of the business.
(long term investment)

Question 22

What is a mortgage?

Answer 22

It is a loan which is secured on a property. The business will own the property after the last payment has been made.
(long-term source of finance)
Normally for a period of 25 years
Interest is payable

Question 23

What does leasing allow a business to do?

Answer 23

It allows the business to obtain assets (like renting) without paying a large sum of money.
(medium-term source of finance)

Question 24

Explain trade credit

Answer 24

When the business has use of goods instantly and pays the supplier 30-90 days later.
(short-term source of finance)

Question 25

What are grants?

Answer 25

Grants are government payments to businesses which are given with conditions, for example, creating jobs or locating somewhere. They do not have to be paid back.

Question 26

Explain invoice discounting

Answer 26

Reductions offered to customer making products or services cheaper often applied as a %

Question 27

What are donations?

Answer 27

Donations are given to organisations such as charities, community groups or social enterprises

Question 28

What is peer-to-peer lending?

Answer 28

One business person lending money to another in return for interest payments

Question 29

What are the advantages and disadvantages of Owners capital?

Answer 29

+ No interest payments or need to repay
High level of commitment from the owner
- Amount available is likely to be limited
If there is more than one owner this could cause friction if everyone is not able to contribute the same amount

Question 30

What are the advantages and disadvantages of Loans?

Answer 30

+ Regular pre-agreed repayments make planning and budgeting relatively easy
Ownership or control is not lost
- Interest is charged on the amount borrowed Interest rates can fluctuate
Often secured against an asset which can be seized if repayments are missed Interest has to be paid regardless of whether a profit is being made

Question 30

What are the advantages and disadvantages of Crowd Funding?

Answer 30

+ Offers the ability to raise finance from many investors
No interest is paid as investors will only be rewarded if the business is successfully sold on later
- Partial loss of ownership No guarantee that the crowd fund will attract sufficient investment to meet the proposal

Question 31

What are the advantages and disadvantages of Mortgages?

Answer 31

+ Large amounts of finance can be raised
Repaid over a prolonged period
Ownership or control is not lost
- Interest is charged and can fluctuate
Often secured against an asset which can be seized if repayments are missed Interest
has to be paid regardless of whether a profit is being made
Not suitable for small amounts or as a short-term source of finance

Question 32

What are the advantages and disadvantages of Venture capital?

Answer 32

+ Finance is provided by a business professional who offer advice and mentoring alongside the investment
Venture capitalists are often risk takers and may see the potential in a high-risk investment that other investors
including banks may not be willing to invest in
- Partial loss of ownership and control
Conflict can arise between the entrepreneur and venture capitalist regarding the direction and day-to-day running of the business

Question 33

What are the advantages and disadvantages of Debt factoring?

Answer 33

+ Speeds up the flow of cash into the business from debts
The factor company takes on the risk of bad debt
- Only receive a percentage of the amount owed, therefore reducing profits
Can give the wrong impression or alienate customers

Question 34

What are the advantages and disadvantages of Hire Purchase?

Answer 34

+ Avoids the need to pay a lump sum for the use of an asset
Regular instalments make planning and budgeting easier
Spreads the cost of an asset over its useful life
- Overall amount paid for the use of an asset is likely to be higher than if purchased outright
Only suitable for relatively low-cost assets, e.g. vehicles and not premises

Question 35

What are the advantages and disadvantages of Leasing?

Answer 35

+ Responsibility for maintaining and repairing the asset stays with the supplier
Spreads the cost of an asset over its life to avoid paying a lump sum up front
- Overall amount paid for the use of an asset is likely to be higher than if purchased outright
Never actually own the asset and therefore payments are ongoing

Question 36

What are the advantages and disadvantages of Trade Credit?

Answer 36

+ Delays the need to pay for goods and services purchased, therefore aiding cash flow
No loss of ownership or control
- Potential loss of discounts offered for cash payments
Only suitable as a short-term source of finance

Question 37

What are the advantages and disadvantages of Grants?

Answer 37

+ No need to repay and no interest charges
No loss of ownership or control
_ Often require a lengthy application process
Might only be awarded if certain conditions are met affecting the way the business operates on a day-to-day basis

Question 38

What are the advantages and disadvantages of Donations?

Answer 38

+ No need to repay and no interest charges
No loss of ownership or control
- Likely to be small amounts only
Unpredictable

Question 39

What are the advantages and disadvantages of Peer to Peer lending?

Answer 39

+ Interest rates can be lower than lending from more traditional financial institutions
Fixed rate of interest can be agreed making it easier to plan and budget
- Amounts available may be limited and provided for a short period of time only

Question 40

What are the advantages and disadvantages of Invoice Discounting?

Answer 40

+ No need to repay and no interest charges
No loss of ownership or control
Reduces costs to the business so increases profit
- Often only available if purchases are paid in cash which affects cash flow