Business Finance - 107

Question 1

Retained profit (internal)

Answer 1

(+)free (no interest) and instantly available
(-)May not have any and may not be enough

Question 2

Working capital (Internal)

Answer 2

• By reducing their trade credit period and collecting debts more efficiently, a business may receive money from customers more quickly.(current assets - current liabilities- dont need to know)
• Reducing stock holdings is another way to release finance.
  (+)Free and can gain instant access
  (-) May leave the business short of cash when needed

Question 3

Sales of assets (Internal)

Answer 3

• Established businesses are able to sell off assets that are no longer required, such as buildings and machinery.
  (+)Frees up cash invested in assets no longer needed
  (-)Reduced capacity to earn revenue

Question 4

Bank loan (external)

Answer 4

*A loan is borrowing a
fixed amount, for a fixed
period of time, perhaps
3–5 years
(+)Can spread costs over a fixed term and make manageable payments
(-)Must pay interest and requires bank approval

Question 5

Overdraft (external)

Answer 5

An overdraft is the facility
to withdraw more from
an account than is in the
bank account, resulting in
a negative balance.
(+)Quick and easy to arrange and you only use the facility when you need it
(-)Expensive over the long term (interest) and can be withdrawn at any time

Question 6

Trade credit (external)

Answer 6

Businesses buy items
such as fuel and raw
material and pay for them
at a later date.
(+)Free source of credit and can be used to delay payments to the business
(-)Could be missing out on discounts and could be withdrawn in relationship with supplier and get a bad reputation

Question 7

Debt factoring (external)

Answer 7

Factoring is a method of
turning invoices into cash.
(+)Instant cash for money
(-)lose some of value and reduces profit margins

Question 8

Leasing and hire purchasing (external)

Answer 8

The company gains use
of a productive asset,
without ever owning it.They pay monthly fee.
(+)Leases are generally easier to obtain than loans and Equipment can be updated regularly.
(-)Over a long period of time, it can be a very expensive and well in excess of the purchase price.Bad for cash flow has an extra monthly payment expense
(-)The business never gets to own the items leased.

Question 9

sale and lease back (external)

Answer 9

This involves the business
selling assets (buildings,
machinery) to a finance
company and then leasing the asset back.
(+)An asset owned by the business can be turned into capital for reinvestment in the business.
(-)Once the item has been sold, it is no longer an asset of the business thus it is a one time option.

Question 10

Share capital

Answer 10

A long-term method
of providing funds for
growth is to sell shares.
(+)Share capital is a form of permanent capital; this means it does not have to be repaid.
(-)Loss of control – the business owner or owners will have decisions influenced by new investors.

Question 11

Venture capital

Answer 11

Professional investors
who can invest large
amounts of capital into
small- and medium-sized
businesses.
(+)Possibly large sums of money can be attained quickly. And advice may also be given.
(-)Will not only take a shareholding but also expect to be fully involved in running the business.

Question 12

Government Grants/ Government Assistance

Answer 12

Both local and central
government may offer
finance to business startup schemes.
(+)Usually given to small businesses in regions where unemployment is high. And often, they are grants that do not have to be repaid.
(-)They tend to be small amounts that last only for a relatively short period of time. And not everyone is eligible

Question 13

What is working capital?

Answer 13

The money needed to finance the day-to-day running of the business. It allows stock to be bought and wages and bills to be paid.

Question 14

what is capital expenditure?

Answer 14

Businesses just starting up need money to invest in fixed assets such as buildings and equipment