business finance: needs and sources

Question 1

why do businesses need finance

Answer 1

• start up capital
• capital for expansion
• working capital

Question 2

internal sources of finance examples

Answer 2

• retained profits
• sale of existing assets
• sale of inventories
• owners inventories

Question 3

retained profit advantages

Answer 3

• not repaid
• no interest to pay

Question 4

retained profit disadvantages

Answer 4

• not suitable for new businesses
• limited amount available
• may reduce payment made to owners or return to shareholders

Question 5

sale of existing assets advantages

Answer 5

• better use of assets
• debts not increased

Question 6

sale of existing assets disadvantages

Answer 6

• it takes time
• may not have spare assets to sell

Question 7

sale of inventories advantages

Answer 7

• reduces storage costs
• less capital tied up in inventories

Question 8

sale of inventories disadvantages

Answer 8

• if inventories are too low then customers are disappointed as demand is not quickly satisfied

Question 9

owner’s savings advantages

Answer 9

• available quickly
• no interest paid

Question 10

owner’s savings disadvantages

Answer 10

• may not be sufficient

Question 11

short term external sources of finance examples

Answer 11

• micro finance
• overdraft
• trade credit
• factoring debt

Question 12

micro finance advantages

Answer 12

• available to poorer groups in society
• useful if nowhere else to borrow from
• no security required

Question 13

micro finance disadvantages

Answer 13

• interest needs to be paid
• loans usually very small

Question 14

overdraft advantages

Answer 14

• interest only paid on amount borrowed
• flexible form of borrowing
• cheaper than loans in short run

Question 15

overdraft disadvantages

Answer 15

• interest rate higher than bank loan
• more expensive than loans in long run
• often asked to be repaid on demand

Question 16

trade credit advantages

Answer 16

• no interest required

Question 17

trade credit disadvantages

Answer 17

• needs to be paid or else goods not supplied

Question 18

factoring debt advantages

Answer 18

• immediate cash
• no risk of debt not being repaid

Question 19

factoring debt disadvantages

Answer 19

• receive less than the full amount of debt

Question 20

long term external sources of finance examples

Answer 20

• grants and subsidies
• bank loans
• issue of shares
• leasing
• crowdfunding
• hire purchase
• selling debentures

Question 21

grants and subsidies advantages

Answer 21

• not repaid

Question 22

grants and subsidies disadvantages

Answer 22

• may have certain conditions attached

Question 23

bank loans advantages

Answer 23

• quick to arrange
• varying repayment period
• large companies pay a low rate of interest

Question 24

bank loans disadvantages

Answer 24

• repaid with interest
• security/collateral required

Question 25

issue of shares advantages

Answer 25

• do not have to be repaid
• no interest paid

Question 26

issue of shares disadvantages

Answer 26

• dividends expected
• ownership could change hands
• can only be utilised by companies

Question 27

leasing advantages

Answer 27

• large cash outlay not required to purchase asset
• maintenance paid for by leasing company

Question 28

leasing disadvantages

Answer 28

• total payment higher than purchase price of asset
• you never get to own the asset

Question 29

crowdfunding advantages

Answer 29

• uses internet to raise finance from many investors
• fast and cost effective
• good test of new business idea

Question 30

crowdfunding disadvantages

Answer 30

• gives competitors detail of business idea
• may not raise all finance required

Question 31

hire purchase advantages

Answer 31

• large cash outlay not required to purchase asset

Question 32

hire purchase disadvantages

Answer 32

• interest paid
• asset not owned until last payment made
• may require a deposit

Question 33

selling debentures advantages

Answer 33

• raises long term finance

Question 34

selling debentures disadvantages

Answer 34

• repaid with interest

Question 35

factors affecting choice of source of finance

Answer 35

• amount required
• size of business organisation
• type of business organisation
• control over the business
• risk and gearing (if it already has loans)
• purpose of finance
• period of time for which finance is required