Business finance

Question 1

Define sources of finance

Answer 1

The options available to a business when seeking to raise funds to support future business actions

Question 2

List the sources of finance

Answer 2

Debt factoring, overdrafts, retained profit, share capital, loans, venture capital and crowd funding

Question 3

What is debt factoring (external)

Answer 3

The process of selling the debts owed to a business to a financial institution, the business receives 80% of the total value of the debt immediately

Question 4

What are the advantages of debt factoring

Answer 4

Receive majority of the debt instantly, good source of short term finance to address cash flow issues, debts are chased by experts to save time, reduces risk of bad debt

Question 5

What are the disadvantages of debt factoring

Answer 5

Reduces profitability of the firm as they do not receive the whole debt, may damage reputation as they are seen as desperate

Question 6

What is an overdraft (external)

Answer 6

The facility to overspend on a current account up to an agreed sum, the business can withdraw money from an account that is not there meaning they go in the red, interest is charged on this amount

Question 7

What are the advantages of overdrafts

Answer 7

Only borrowed when needed so its flexible, only pay for the amount borrowed, quick and easy to arrange, no charges for paying it off

Question 8

What are the disadvantages of overdrafts

Answer 8

The bank can call it in at any time, only available from a current account, variable interest payments make it hard to budget, may be secured by assets

Question 9

What is retained profit (internal)

Answer 9

Profit kept within a business from profit for the year to help finance future activities

Question 10

What are the advantages of retained profit

Answer 10

Avoids interest, does not dilute ownership

Question 11

What are the disadvantages of retained profit

Answer 11

Only possible if profit is retained, reduces dividend payments, reduces security blanket

Question 12

What is share capital

Answer 12

Finance raised from the sale of shares

Question 13

What are the advantages of share capital

Answer 13

Only pay dividends if a profit is made, possible to raise large amounts of finance, no interest

Question 14

What are the disadvantages of share capital

Answer 14

Loss of ownership, loss of control (hostile takeovers) are more likely, complex and costly process

Question 15

What is a loan (external)

Answer 15

A set amount of money provided for a specific purpose, to be repaid with interest over a set period of time

Question 16

What are the advantages of loans

Answer 16

Quick and easy to secure, fixed interest rate makes budgeting easier, improves cash flow, borrower retains ownership

Question 17

What are the disadvantages of loans

Answer 17

Interest must be paid, may be seen as high risk, normally has to provide assets as security, usually more expensive, charged a penalty for early repayment

Question 18

What is venture capital

Answer 18

Investment from an established business into another business in return for a percentage equity in the business, they usually also mentor the owners

Question 19

What are the advantages of venture capital

Answer 19

Large sums of money, expertise to help the business, easier to attract other sources of finance, easy to expand

Question 20

What are the disadvantages of venture capital

Answer 20

A long and complex process, financial projections are required, initially expensive (legal and accounting fees), partial loss of ownership and risk of conflict

Question 21

What is crowdfunding

Answer 21

Raising finance from a large number of people each investing different (often small) amounts of money, the business promotes what they money is for and their predicted return on investment