Business Finance

Question 1

What does a business need finance for

Answer 1

Set up a business
Keep business going
Expand and grow

Question 2

What factors determine if investment is available

Answer 2

1 how well established the business is
2 amount of profit previously made
3 how much security a business can offer
4 type of business eg sole trader, partner, public or private ltd

Question 3

What are the 3 sources of internal finance

Answer 3

1 owners capital
2 sale of assets
3 reinvested profit

Question 4

Describe sale of assets

Answer 4

1 sell assets owned by business they no longer need eg old factory
2 usually only an option when all other ways to raise money have failed
3 sometimes they will lease back the asset they have sold eg offices

Question 5

Describe reinvested profit

Answer 5

1 when a profit is made it can be paid to investors/ or can be reinvested in the business
2 good as there is no interest to pay on the invested money as it would with a bank loan

Question 6

describe owners capital

Answer 6

1 may be only method to raise capital for a small business
2 can be own savings or selling of their assets eg home

Question 7

What are the sources of external finance

Answer 7

1 bank loan
2 overdraft rom bank
3 venture capital
4 diet factoring
5 trade credit
6 hire purchase
7 leasing assets
8 share issue or new partners

Question 8

Describe share issue or new partners

Answer 8

1 for sole trader taking a new partner is good way to gain investment and skills
2 share issue is offering for sale new shares in a business

Question 10

Describe overdraft from bank

Answer 10

1 from of bank borrowing
2 business is overdrawn when it withdraws more money from account than is in it, leaving a negative balance
3n overdraft limit is agreed with bank business can use whenever it wants
4 bank will charge interest which are often high
5 bank can demand repayment at any time and some businesses have ceased trading because overdraft facility has been withdrawn e

Question 11

Describe a bank loan

Answer 11

1 lending by bank to a business
2 fixed amount for a fixed period for a specific purpose
3 interest is charged
4 bank will only loan if business is credit worthy and may require security - which will be reposted if loan not paid

Question 12

Describe trade credit

Answer 12

Buying goods on credit and paying when revenue comes in

Question 13

Describe leasing assets

Answer 13

1 business pays monthly for assets that they will never own
2 allows equipment to be updated regularly
3. Long term costs more and never have an asset

Question 14

Describe hire purchase

Answer 14

At the end of the hire period the asset belongs to the business

Question 15

Describe venture capital

Answer 15

1 money invested by professional investors
2 they expect to see profit on their investment in 2 years and want a say in how the business is run
3 usually they get an equity stake - in exchange for their investment they get a shareholding
4 for the business there is no interest and they get ongoing business advice but current owners cab lose control of the business they have built

Question 16

describe debt factoring

Answer 16

1 finance companies will pay the selling business part o the invoice as soon as it is made
Eg if x sells goods on 30 days credit to Y for £5000 debt factor pays X a % of the debt - they will hold the invoice full value from the company