business finance

Question 1

why do businesses need finance?
(3)

Answer 1

-for initial funds
- for working capital/ cash flow
- for investment capital

Question 2

what factors should be considered when looking at finance? (3)

Answer 2

-how much funding is needed
-the amount of time the money is required for
-the affordability of repayments

Question 3

what are the three internal sources of finance?

Answer 3

1. retained profit
2. working capital
3. sale of assets

Question 4

1. what is retained profit?
2. what are the advantages of retained profit?
3. what are the disadvantages of working capital?

Answer 4

1. reserves that provide a liquidity buffer
2. • cheap
   • easily accessible
3. • loss of distribution to owners
   • the money could be used else where in the business

Question 5

1. what is working capital?
2. what are the advantages of trade credit?
3. what are the disadvantages of working capital

Answer 5

1. day to day running revenues
2. • improves cash flow by factors such as allowing business pay suppliers on time
   • cost efficiency, reducing costs associated with borrowing
3. • opportunity cost- these funds could be used more effectively in the business for long term growth
   • management complexity as maintaining optimal working capital requires careful management

Question 6

1. what is the sale of assets?
2. what are the advantages of selling assets?
3. what are the disadvantages of selling assets?

Answer 6

1. selling of assets that are no longer required
2. • immediate access to quick cash
   • avoids borrowing costs
3. • smaller businesses are unlikely to want to sell assets if growth is a main objective
   • could hinder the companies ability to operate

Question 7

1. what is a bank loan?
2. what are the advantages of a bank loan?
3. what are the disadvantages of a bank loan?

Answer 7

1. money provide by a bank that a business will have to pay interest on
2. • easy and quick to acces
   • can get a significant amount at one time
3. • have to pay interest
   • difficult for a new business to access
   • can effect credit score if repayments are delayed or not made

Question 8

1. what is an overdraft facility?
2. what are the advantages?
3. what are the disadvantages

Answer 8

1. when a bank allows a firm to take out more money than it has in its bank account
2. • quick to access
   • allows emergency purchases
3. • high interest rates
   • short term solution

Question 9

1. what is debt factoring?
2. what are the advantages?
3. what are the disadvantages?

Answer 9

1. using a factoring service to turn invoices into cash
2. • access to immediate cash flow instead of waiting for customers to pay invoices
   • focus on business since the factor handles collections
3. • not suitable for all businesses
   • can be expensive as factoring services collect fees

Question 10

1. what is trade credit?
2. what are the advantages ?
3. what are the disadvantages?

Answer 10

1. where suppliers deliver goods now and are willing to wait a number of days before recieving payment
2. • no interest has to be paid
   • access to supplies without immediate payment
3. • business can gain a bad reputation if business take a long time to pay it back
   • short term solution as the money has to be paid off quickly

Question 11

1. what is leasing/ hire purchase
2. what are the advantages?
3. what are the disadvantages?

Answer 11

1. monthly payments made for the use of capital goods such as a car. Leasing equipment is never owned by the company where are hired equipment is owned by the business at the end
2. • no large upfront payment required
   • leasing company may be responsible for repairs and maintenance
3. • overtime it can be a more expensive way to obtain assets
   • assets aren’t owned by the business

Question 12

1. what is a commercial mortgage?
2. what are the advantages?
3. what are the disadvantages?

Answer 12

1. a type of loan specific to buying property where monthly payments are spread over a number of years
2. • lower interest rates than other sources of unsecured borrowing
   • long term solution so owners can focus elsewhere in the business
3. • deposit could be difficult to raise
   • falling property prices could affect the value of the property

Question 13

1. what is sale and leaseback?
2. what are the advantages?
3. what are the disadvantages?

Answer 13

1. involves the business selling assets to a finance company then leasing the asset back
2. • potential tax benefits as you can deduct lease payments which lowers taxable income
   • immediate cash flow
3. • pay more by renting in the long term
   • may eventually loose use of the asset when the lease ends

Question 14

1. what is share capital?
2. what are the advantages?
3. what are the disadvantages?

Answer 14

1. finance raised through selling shares to shareholders
2. • no repayment required
   • lower risk of bankruptcy as funds have been raised
3. • more shareholders can lead to loss of control
   • requires careful consideration and may need approval from other shareholders

Question 15

1. what is a venture capitalist?
2. what are the advantages?
3. what are the disadvantages?

Answer 15

1. professional investors who can invest large amounts of capital into SME’s who are fully involved in the running of the business
2. • extra input of skills can help business growth
   • potential to raise huge amounts of money
3. • owner must give away part of the business
   • venture capitalists may have different visions for the business than the owner does

Question 16

1. what is government assistance?
2. what are the advantages?
3. what are the disadvantages?

Answer 16

1. when the local or central government may offer finance to business start up trends
2. • doesn’t need to be paid back
   • available to small business
3. • the business must meet a certain criteria to be eligible
   • amounts are relatively small for a small amount of time