Choosing Sources Of Finance

Question 1

Why may a business require long term finance?

Answer 1

For long term investment e.g to buy machinery

Question 2

When choosing a source of finance what things have to be taken in consideration?

Answer 2

• the legal structure of the business
• amount of money needed
• level of risk involved
• if it’s short or long term finance

Question 3

What is an internal source of finance?

Answer 3

When money is raised through putting profits back into the business

Question 4

What is retained profit?what are the benefits and drawbacks?

Answer 4

-Profit that is retained and built up over the years for later finance
There is no interest on the money
Shareholders may object and may wish to receive profits as dividends

Question 5

What is rationalisation? What are the benefits & drawbacks?

Answer 5

When managers reorganise a business to make it more efficient,don’t by selling assets to generate capital

• Don’t pay interest
• the business no longer owns the asset and has to pay to lease it back

Question 6

What are example of external sources of finance suitable for short term?

Answer 6

Overdrafts & debt factoring

Question 7

What are overdrafts?what are the benefits and drawbacks?

Answer 7

• When a business is allowed to have a negative amount of money in the bank
• easy to arrange
• banks charge high interest rates and fixed charges

Question 8

What is debt factoring?what are the benefits and drawbacks?

Answer 8

When banks and other financial institutes take unpaid invoices off a business and give them instant cash payments

• instant way of getting money
• debt company keeps some money as a fee

Question 9

What can business do to finance projects in the long term?

Answer 9

Take out bank loans

Question 10

Advantages&disadvantages of bank loans?

Answer 10

Ad. Disad
-guaranteed money Difficult to arrange as only lend if sure
-only have to lay back loans. Charged if pay back early
-interest rates are lower than
for overdrafts

Question 11

What’s share & venture capital?

Answer 11

Share-money raised through selling shares in the business

Venture-funding in the form of share/loan capital that’s invested in a high risk business

Question 12

Why may a business require short term finance?

Answer 12

To pay suppliers or cover temporary cash shortages