ch 25 sources of finance

Question 1

Define instalment.

Answer 1

One of a series of regular payments made until all the money owed has been repaid.

Question 2

Define short-term finance.

Answer 2

Money borrowed for one year or less.

Question 3

Define long-term finance.

Answer 3

Money borrowed for more than one year.

Question 4

Define capital.

Answer 4

Finance provided by the owners of a business.

Question 4

Define capital.

Answer 4

Finance provided by the owners of a business.

Question 5

What are the 4 different needs for funds?

Answer 5

• short-term needs
• long-term needs
• start-up capital
• expansion

Question 6

Define internal finance.

Answer 6

Finance generated by the business from its own means.

Question 7

Define retained profit.

Answer 7

Profit held by a business rather than returning it to the owners and which may be used in the future.

Question 8

Define assets.

Answer 8

Resources used or owned by a business, such as cash, stock, machinery, tools, and equipment.

Question 9

Why do businesses prefer to use internal sources of finance?

Answer 9

They are cheap and more readily available.

Question 10

Define external finance.

Answer 10

Finance obtained from outside the business.

Question 11

Give examples on why short term finance would be needed for some businesses.

Answer 11

• some businesses have seasonal trade. A farmer, for example, may need to borrow money for a few months until revenue comes in from selling the harvest.
• a manufacturer may need finances to pay for raw materials and wages to meet a larger order.
• a firm might be short on money because it is waiting for a customer to pay.
• emergency expenditure.

Question 12

Define bank overdraft.

Answer 12

Agreement with a bank where a business spends more than it has in its account (up to an agreed limit)

Question 13

Define trade payables.

Answer 13

Buying resources from suppliers such as raw materials and components and paying them back at a later date.

Question 14

Define mortgage.

Answer 14

Long term loan secured with property.

Question 15

Define repossess.

Answer 15

To take back cars, furniture or property from people who had arranged to pay for them over a long time, but cannot now continue to pay for them.

Question 16

What are 3 main sources of short-term external sources of finance?

Answer 16

• bank overdraft
• trade payables
• credit cards

Question 17

What are the advantages of bank overdraft?

Answer 17

simple and flexible

Question 18

What are the disadvantages of bank overdraft?

Answer 18

The bank has the right to call in the money owed at any time.

Question 19

What are the advantages of trade payables?

Answer 19

• it is a cheap way of raising finance
• it means a business holds on to its cash for longer -> more flexible in use of cash

Question 20

What are the disadvantages of trade payables?

Answer 20

• the cost of goods is often higher if firms buy on credit
• delaying payment may upset suppliers -> bad because it is important to maintain a good relationship between the supplier and the business

Question 21

What are the advantages of using credit cards?

Answer 21

• convenient
• flexible
• avoid interest charges if accounts are settled within the credit period

Question 22

What are the disadvantages of using credit cards?

Answer 22

Interest rates in credit cards are very high if accounts are not settled within the credit period, usually 56 days.

Question 23

what is the advantage of using loan capital?

Answer 23

the business will know exactly what it has to pay every month

Question 24

what is an unsecured bank loan?

Answer 24

this means that the bank lends money without the security of having a claim on your assets if you do not pay back.

Question 25

what are the disadvantages of unsecured bank loans?

Answer 25

- some businesses may find it difficult to get an unsecured bank loan. this is because they present too much risk for banks. - interest rates are higher for unsecured loans compared to secured loans.

Question 26

what are the advantages of mortgages?

Answer 26

- the interest rates are usually lower than those on unsecured bank loans.

Question 27

define debenture.

Answer 27

long-term security yielding a fixed rate of interest, issued by a company and secured against assets.

Question 28

define hire purchase.

Answer 28

buying specific goods with a loan, often provided by a finance house.

Question 29

define rights issue.

Answer 29

sale of new shares to existing shareholders at a discount.

Question 30

debenture holders are ____ of a company, not owners.

Answer 30

creditors

Question 31

what are the feature of a hire purchase agreement.

Answer 31

- the business usually makes a down payment - the remaining fee is paid in monthly instalments the goods bought do not legally belong to the buyer until the very last instalment has been paid - if the buyer falls behind with the repayments, the goods can be repossessed - HP agreements can be short term or long term

Question 32

what are the disadvantages of hire purchase?

Answer 32

it is usually more expensive than a bank loan. this is because lenders are not as strict when checking the risk posed by borrowers.

Question 33

what are the main advantages of selling shares?

Answer 33

- interest payments are avoided - do not have to pay dividends to shareholders if the business is already doing bad

Question 34

what are the disadvantages of selling shares?

Answer 34

- shareholders will expected to be paid dividends if the business is successful - administration costs are costly

Question 35

define venture capitalists.

Answer 35

specialist investors who provide money for business purposes, often to new businesses.

Question 36

what do venture capitalists want from the business they invest in?

Answer 36

they prefer to take a stake in the company, which means they have some control and are entitled to a share in the profit.

Question 37

what is the problem of venture capitalists?

Answer 37

- the business have to find a suitable venture capitalist. the business angel and the business owners must have shared interests and want the same for the future of the business. - the business needs tot share profits with the angel as long as they are involved

Question 38

what are the advantages of crowd funding?

Answer 38

- form of marketing - low risk for an overall high reward - increased exposure

Question 39

what are the disadvantages of crowd funding?

Answer 39

- difficult to get noticed - may take a long time to raise funds - low success rate

Question 40

what is risk gearing?

Answer 40

- measures the proportion of total capital raised from long-term loans - the more long term loans a business has the more highly-geared it is - very risky -> interest has to be paid - banks are reluctant to lend to highly geared businesses