Business Finance

Question 1

What is the definition of finance in business

Answer 1

Finance is money used by a business

Question 2

Why would a business need finance (4)

Answer 2

Start ups:
- Buildings, machinery, raw materials, office equipment

Working capital:
- Day-to-day operations

Unforeseen Events:
- Sudden demand or expense changes

Growth:
- Expansion requires capital

Question 3

What are the 2 types of finance a business could seek

Answer 3

Internal - Finance that doesn’t increase debt
External - Finance that increases debt (e.g., loans)

Question 4

What are the time periods for finance

Answer 4

Short term = 0–3 years
Medium term = 3–10 years
Long term = 10+ years

Question 5

What are the types of internal finance + evaluate (4)

Answer 5

Personal savings:
+ Instant, no interest, no need for convincing
- Risky

Retained profits:
+ Quick, no interest, no convincing
- Less safety nets, may not be enough

Sale of fixed assets:
+ Large sums, lower fixed costs
- Bad deal if desperate, lengthy

Sale and lease back:
+ Raise funds, retain use of asset
- Lose appreciated value, increase fixed costs

Question 6

What are the types of external finance + evaluate (6)

Answer 6

Trade credit:
+ Free short-term finance

Loan capital:
Overdraft: short term, flexible
Loan: agreed terms, committed funding

Leasing and hire purchase:
+ Short term cheap, flexible
- Costly long term

Share capital:
+ Large investment
- Loss of ownership

Venture capitalist:
+ Capital for equity
- Return based on growth and profitability

Debt factoring:
+ Fast cash
- Lower net profit