Business Finance: D1

Question 1

D1- Internal Finance: (3)

Answer 1

No interest payments
• Retained Profit
• Net Current Assets
• Sale of Assets

Question 2

Retained Profit

Answer 2

Profit=Sales Revenue-Total Cost
Money kept in the business to fund future
Advantages:
- Only available up to the amount already accumulated by the business, therefore avoids debt
- No loss of ownership (control)
Disadvantages:
- Amount available may be limited
- Once used, it is not available for alternative purposes

Question 3

Net Current Assets

Answer 3

Shows the money available in the business to fund day to day expenditure
Net assets=Current Assets-Current Liabilities
Assets: owned
Inventory (stock)
Trade receivables
Cash and cash equivalents
liabilities: owed
Trade payables
Overdrafts
Advantages:
- Encourages the business to manage cash flow effectively
Disadvantages:
- Can put pressure on customers as shorter credit terms are offered

Question 4

Sale of Assets

Answer 4

Selling an item of value in order to achieve a cash injection
Advantages:
- Can mean disposing an asset no longer of use to the business
Disadvantages:
- It is likely the amount received is not a true reflection of the value of the asset

Question 5

External finance:

Answer 5

The places where finance can be raised from outside the business

Owner’s Capital
Share Capital
Loans
Crowd-funding
Mortgages
Venture Capital
Debt Factoring
Hire Purchase
Leasing
Trade Credit
Grants
Donations
Peer-to-peer lending
Invoice discounting

Question 6

Owner’s Capital

Answer 6

Money invested in the business from the owners personal savings
Advantages:
- Do not have to go through any lengthy application process- like with loan
- Do not have to repay anything
Disadvantages:
- Threat to personal finances and money - money could be needed later for personal reasons

Question 7

Share Capital (long term)

Answer 7

Finance raised from shares by shareholders
Advantages:
- Possible to raise large amounts of finance
- No interest rates
Disadvantages:
- Loss of ownership as shareholders are part owners
- Complex/ costly process of issuing shares, especially for a PLC

Question 8

Loans (long term)

Answer 8

Money borrowed from a financial institution normally for a set period of time and for a specific purpose
Advantages:
- Quick/easy to secure
- Fixed interest rates allow firms to budget
Disadvantages:
- Interest
- Often more expensive than other forms of finance due to interest
- Can be charged a penalty for early repayment

Question 9

Crowdfunding

Answer 9

Attracting investment from a large number of speculative investors, many of whom may invest relatively small amounts
Advantages:
- No interest
- Investors are only rewarded if the business is successfully sold at a later date
Disadvantages:
- Partial loss of ownership
- No guarantee that the crowd fund will attract enough investment

Question 10

Mortgages

Answer 10

Long term loans, usually around 25 years, that are secured against a specific asset E.g a building
Advantages:
- Allows a business to buy a property that they wouldn’t otherwise have the money to purchase
Disadvantages:
- Interest must be paid
- Secured against an asset, usually the property

Question 11

Venture Capital (long term)

Answer 11

Investment from an inexperienced entrepreneur in return for a stake in the business (private equity finance)
Advantages:
- Potential for large sums of money for investment
- Provided the required capital for expansion
Disadvantages:
- Partial loss of ownership- the venture capitalist will own part of the business
- Initially expensive for the firm

Question 12

Debt Factoring (short term)

Answer 12

Selling the debts of a business to a 3rd party in order to receive a quick cash injection
Advantages:
- Good source of short term finance to address cash flow problems
- Reduces the risk of bad debt
Disadvantages:
- May damage the reputation of the firm as they are seen to be in need of short term finance

Question 13

Hire Purchase

Answer 13

Paying to use an asset in instalments, to spread the cost over its useful life
Advantages:
- Spreads the cost
- Can pay in monthly instalments over a number of years = affordable and manageable
Disadvantages:
- May cost more than if paying outright because of interest

Question 14

Leasing (short term)

Answer 14

Paying to use an asset in instalments, however the ownership of the asset remains with the supplier throughout the lease agreement
Advantages:
- The company leasing the asset is responsible for any repairs/ maintenance, so the business can get it fixed if it breaks/ get a new version if it is upgraded
Disadvantages:
- The business NEVER owns the asset
- May be more costly in the long run

Question 15

Trade Credit (short term)

Answer 15

A period of time, offered by suppliers, to allow the customer to purchase now and pay later
Advantages:
- No need to repay
- No loss of ownership/ control
Disadvantages:
- The business may lose out on discounts offered for immediate/ quick payments, increasing costs

Question 16

Grants (short term)

Answer 16

A lump sum provided to a business by the government or another organisation, to be used for a specific purpose
Advantages:
- No need to repay
- No loss of ownership/ control
Disadvantages:
- Not every business can get a grant- often conditions are attached E.g support a good cause

Question 17

Donations

Answer 17

Sums of money given voluntarily to a charity/ social enterprise
Advantages:
- No need to repay
- No loss of ownership/ control
Disadvantages:
- Normally only available to nonprofit organisations
- Generally small amounts

Question 18

Peer-to-peer Lending

Answer 18

Involves one business lending money to another business person in return for interest payments
Advantages:
- Interest rates can be lower as individuals offer lower interest rates to win the lending
Disadvantages:
- May only be short term loans
- Small amounts

Question 19

Invoice Discounting

Answer 19

Reductions offered to customers, making a product/ service cheaper. Usually applied as a % of the total value
Advantages:
- No need to repay
- No loss of ownership/ control
- Reduces costs, hence freeing up finance for other purposes
Disadvantages:
- May have a negative effect on profitability in the long term
- Often only available if paying in cash