Chapter 6 - Sources of Finance

Question 1

What are some things an enterprise might use money for?

Answer 1

• buy or rent premises
• purchase equipment
• funds for introducing new products/services
• funds for replacing equipment

Question 2

What is the name given for the many ways an enterprise can get money?

Answer 2

sources of finance

Question 3

Define sources of finance

Answer 3

the way in which an enterprise gets the money it needs to finance an activity

Question 4

Define finance

Answer 4

the activities of an enterprise relating to money

Question 5

Define start-up

Answer 5

the period of an enterprise when it is first set up

Question 6

Define internal sources of finance

Answer 6

money that is found within the enterprise

Question 7

Define interest

Answer 7

often, when an enterprise borrows money from a lender, they will have to pay back the amount they borrows plus an additional agreed amount. the additional amount is known as interest

Question 8

What are the different sources of finance that could be used by an enterprise?

Answer 8

• personal savings
• investments from family and friends
• bank overdrafts
• bank / building society loan
• leasing
• mortgages
• community sources (e. g. go fund me)
• grants
• subsidies
• crowd funding
• selling shares

Question 9

Define External sources of Finance

Answer 9

money that is found outside the enterprise

Question 10

Define assets

Answer 10

objects that are owned by the business

Question 11

Define founders

Answer 11

the people who start a company

Question 12

What are the main types of finance an enterprise may have to access to continue trading or expand?

Answer 12

• personal savings
• retained profits
• private institutions
• venture capital
• issue shares

Question 13

Describe personal savings and give some advantages and disadvantages

Answer 13

Description: a small investment in a business, normally paid back with interest

Advantages: you do not need approval to use your own money. if it is successful get your money back plus interest

Disadvantages: if the enterprise is unsuccessful, you may lose all the money you invested, this may cause hardship

Question 14

Describe investments from family and friends and give some advantages and disadvantages

Answer 14

Description: a small investments in a business normally paid back with interest

Advantages: family and friends will often be keen to support you and your enterprise. they usually charge lower interest than other lenders, such as banks

Disadvantages: if the enterprise is unsuccessful, you may lose all the money that friends and family have invested, this can cause upset and hardship

Question 15

Describe bank overdrafts and give some advantages and disadvantages

Answer 15

Description: a form of short term lending by the bank when there is no money left in the enterprise’s bank account

Advantages: can cover a short term financial issue

Disadvantages: a very short term option as interest is charged at a very high rate

Question 16

Describe bank / building society loan and give some advantages and disadvantages

Answer 16

Description: a larger, longer term investment paid back at an agreed interest rate

Advantages: larger sums of money are available

Disadvantages: you need to provide detailed financial information to get the loan approved. Interest rates can be high. If you fail to make these payments on the loan the bank may seize assets of the enterprise

Question 17

Describe leasing and give some advantages and disadvantages

Answer 17

Description: you rent a piece of equipment for a monthly fee but the equipment belongs to the leasing company

Advantages: short term is often cheaper than buying the equipment outright. after a fixed period of time the equipment is often updated to the latest model

Disadvantages: long term this can be expensive because the fees may come to more than the equipment would have cost

Question 18

Describe mortgages and give some advantages and disadvantages

Answer 18

Description: a larger, longer term loan used to buy property and paid back at an agreed interest

Advantages: large sums of money can be borrowed to buy property for the business. Generally a much lower rate of interest than other forms of borrowing

Disadvantages: You need to provide detailed financial information to get the mortgage approved. If you fail to make payments on the loan the bank may seize property that was bought using the mortgage

Question 19

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Question 32

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