Chapter 16- obtaining finance

Question 1

Internal finance

Answer 1

Comes from within the business. Can be retained profit or cash raised from sale of assets

Question 2

Personal saving

Answer 2

Is an important source of finance for new or small businesses. Before getting started, the entrepreneur will save in order to fund the early expenses associated with the production process. It may also contribute to the purchase of capital equipment

Question 3

Retained profit

Answer 3

Is profit that is being reinvested in the business rather than being given to the owners of the business in the form of dividends payments. It doesn’t incur interest payments or dilute ownership of the business. It’s a long term source of finance

Question 4

Sale of assets

Answer 4

Can refer to physical assets such as machinery or property, or to intangible assets such as the patent to a particular product. It’s a long term source of finance

Question 5

Working capital

Answer 5

Is cash held by the business and used to keep day to day business going in the short run

Question 6

External financial

Answer 6

Comes from banks or investors that have no direct connection with the company

Question 7

Ordinary share capital

Answer 7

Is long term finance raised raised by selling shares in a business. Share capital does not have to be repaid. Investors receive part ownership of the business and a share of the profits in the form of dividends

Question 8

Equities

Answer 8

Another name for shares

Question 9

Stock exchange

Answer 9

A market where shares in PLCs can be bought and sold. Investors can sell if for some reason reason they need the money they invested

Question 10

Venture capital

Answer 10

Is money invested in a new business by one or more individuals who believe that the business will succeed and therefore increase in value but are willing to accept the risk that the business idea may fail. Venture capitalists may offer advice and technical support as well as finance. Is long term and may be provided in exchange for a share of the equity of a business.

Question 11

Loan

Answer 11

Is an amount of money borrowed for a fixed period at a fixed interest rate. The loan is paid back in regular instalments until the total amount plus interest is paid. Loans are medium to long term sources of finance

Question 12

Overdraft

Answer 12

Is a short term flexible loan where a bank allows a business to operate with a negative bank balance. Interest is paid on the amount overdrawn, usually at a higher rate than is charged for a fixed sum loan. Overdrafts are useful covering a short term debt.

Question 13

Leasing

Answer 13

Is used by a business that needs land, buildings or equipment which they are unable or willing to buy outright. It’s the name given to renting an asset without owning it. Many businesses lease vehicles or office equipment

Question 14

Trade credit

Answer 14

Is a short term source of finance offered when suppliers allow a time period before payment for supplies must be made. The credit period will vary between suppliers and may be changed by the supplier at anytime