business finance

Question 1

what does internal finance mean?

Answer 1

funds found from inside the business such as owners capital, retained profits and sales of assets

Question 2

what does external finance mean?

Answer 2

funds found from outside the business such as family and friends, bank loans and business angels

Question 3

what does the business need to consider in order to find the most suitable source of finance?

Answer 3

-how much funding is needed
-how long the money is required
-what the finance will be used for
-whether or not personal or business assets are available as security
-whether or not the business owner is willing to give up a share of ownership

Question 4

what are examples of internal sources of finance?

Answer 4

-retained profit/own funds
-working capital
-sales of assets

Question 5

what are the advantages and disadvantages of retained profit/owned funds?

Answer 5

AD:
* Cheapest form of finance as you do not have to pay interest on own money.
* Immediately available.

DIS:
* Money is tied up in business so not earning interest.
* Cannot use for other purposes

Question 6

what are the advantages and disadvantages of working capital?

Answer 6

AD:
* By reducing their trade credit period and collecting debts more efficiently, a business may receive money from customers more quickly.
* Reducing stock holdings is another way to release finance.

DIS:
* This is likely to drive customers away and may have the opposite effect on making finance available.
* A sudden surge in demand could result in lost sales if the business is unable to meet delivery dates.

Question 7

what are the advantages and disadvantages of sales of assets?

Answer 7

AD:
* Established businesses are able to sell off assets that are no longer required, such as buildings and machinery.

DIS:
* Smaller businesses are unlikely to have such unwanted assets and, if growth is an objective, they are much more likely to want to acquire assets as opposed to losing them.

Question 8

what are examples of external sources of finance?

Answer 8

-bank loans
-overdraft
-trade credit
-factoring
-leasing
-hire purchasing
-commercial mortgages
-sale and leaseback
-share capital
-business angels
-government grants

Question 9

what is a bank loan?

Answer 9

A loan is borrowing a fixed amount, for a fixed period of time, perhaps 3–5 years

Question 10

what is the advantages and disadvantages of a bank loan?

Answer 10

AD:
* If application for the loan is successful, the money becomes immediately available.
* Payments made up of interest and capital are made monthly, which can help with cash flow planning

DIS:
* Interest has to be paid on the loan; thus, businesses have to pay back more than what they borrowed.
* Very difficult to obtain for small businesses. It is likely that most new start-ups are unlikely to receive a loan unless security is offered.

Question 11

what does overdraft mean?

Answer 11

An overdraft is the facility to withdraw more from an account than is in the bank account, resulting in a negative balance.

Question 12

what are the advantages and disadvantages of a overdraft?

Answer 12

AD:
* Very useful for overcoming short term liquidity problems – useful for day-to-day transactions, easing cash flow needs and emergency requirements.
* Only pay interest when account is overdrawn, i.e. do not have to pay off regular sums.

DIS:
* Interest charged can be very high indeed.
* The overdraft limit tends to be fairly low for small businesses.
* May be arrangement fee.
* Can be called in immediately – it is repayable on demand.

Question 13

what does trade credit mean?

Answer 13

Businesses buy items such as fuel and raw material and pay for them at a later date.

Question 14

what are the advantages and disadvantages of trade credit?

Answer 14

AD:
* The 30-90 days offered by suppliers can be viewed as interest
free way of raising finance.

DIS:
* Suppliers often offer discounts for cash or early payments, meaning the cost of goods is higher if full credit period is used.
* Late payment can also lead to a business gaining a bad reputation with suppliers.

Question 15

what does factoring mean?

Answer 15

Factoring is a method of turning invoices into cash.

Question 16

what are the advantages and disadvantages of factoring?

Answer 16

AD:
* This flexible form of finance keeps pace with business growth as the funding is directly linked to the turnover of the company.
* The factor will also undertake all credit management and collections work.

DIS:
* Factoring services are only offered to businesses with a good trading record and reliable customers.

Question 17

what does leasing mean?

Answer 17

The company gains use of a productive asset, without ever owning it.

Question 18

what are the advantages and disadvantages or leasing?

Answer 18

AD:
* The business acquires the use of resources without the need for a large sum of money.
* The maintenance and repair bills are met by the leasing company.
* Leases are generally easier to obtain than loans.
* Equipment can be updated regularly

DIS:
* Over a long period of time, it can be a very expensive and well in excess of the purchase price.
* The business never gets to own the items leased.

Question 19

what does share capital mean?

Answer 19

A long-term method of providing funds for growth is to sell shares

Question 20

what are the advantages and disadvantages of share capital?

Answer 20

AD:
* Share capital is a form of permanent capital; this means it does
not have to be repaid.
* Owners of shares have a say in how the business is run, but the
amount of influence they have depends upon the percentage
shareholding they own.

DIS:
* Loss of control – the business owner or owners will have decisions influenced by new investors.
* New shareholder investors may be looking for an exit strategy within a few years