F Sources of Finance

Question 1

Describe retained profits

Answer 1

Internal source of long term finance.

Profits that have been kept back by the business and put back into it to generate more profit in the future.

Question 2

Advantages of retained profits

Answer 2

• Very flexible as the business can choose to spend it on whatever they want
• Does not dilute ownership

Question 3

Disadvantages of retained profits

Answer 3

-Can make it slow/difficult to grow, other methods are quicker like borrowing.

Question 4

Describe sale of assets

Answer 4

When a business sells things that the business no longer needs

Question 5

Advantages of sale of assets

Answer 5

• The money raised can boost cash flow

- There is no need for any debts to be repaid

Question 6

Disadvantages of sale of assets

Answer 6

-It can take time to sell assets. If money is needed in a rush, assets may be sold at a lower price that its true value.

Question 7

Describe share issue

Answer 7

Selling shares on the stock market. PLCs sell shares on the stock market and LTDs sell shares privately.

Question 8

Advantages of share issue

Answer 8

• Quick way to raise large amounts of finance

- Doesn’t have to be paid back like a loan

Question 9

Disadvantages of share issue

Answer 9

• Have to pay dividends to shareholders

- Dilutes control/ownership

Question 10

Describe bank loan

Answer 10

A bank agrees to lend a business a specific amount of money that should be repaid in a agreed time frame in regular installments, with interest added on.

Question 11

Advantages of bank loan

Answer 11

• Fairly easy and simple way to obtain finance

- Easy to budget as repaid in monthly instalments withs set interest

Question 12

Disadvantages of bank loan

Answer 12

-Interest can be very high for new businesses who are deemed a higher risk

Question 13

Describe commercial mortgage

Answer 13

Sum of money borrowed from a bank or building society to buy land or property. Payed back over a long period of time, eg 25 years, monthly with interest.

Question 14

Advantaged of commercial mortgage

Answer 14

• The interest rate is fixed and paid back in monthly instalments so is easy to budget
• Can repay over a long period of time, smaller outgoings monthly

Question 15

Disadvantages of commercial mortgage

Answer 15

• Large deposit has to be made

- The mortgage is secured against the property, if the mortgage is unpaid, the property will be taken

Question 16

Describe debt factoring

Answer 16

When the business sells to a factor the debt that is owed to them for less than what the debt is worth. The factor then collects it themselves for the real value to earn a profit.

Question 17

Advantages of debt factoring

Answer 17

• Saves the business time and effort that would be spent trying to collect the debt
• Solves cash flow problems quickly

Question 18

Disadvantages of debt factoring

Answer 18

• Factors are often only interested in large sums of debt

- The business is not receiving the full amount that is owed to them

Question 19

Describe debentures

Answer 19

Loans borrowed from individuals through the stock market. The loan has to be repaid with interest even if a profit is not made.

Question 20

Advantages of debentures

Answer 20

• Ownership is not diluted

- Large amounts of capital can be raised

Question 21

Disadvantages of debentures

Answer 21

• Interest still has to be paid even if loss is made (unlike shares)
• If the business fails to pay, debenture holder can seize assets

Question 22

Describe grants

Answer 22

Money given from an organisation like a government or the princes trust that doesn’t need to be paid back. Often tied to a project to better society, eg improve employment in an area of deprivation.

Question 23

Advantages of grants

Answer 23

-Money doesn’t need to be paid back

Question 24

Disadvantages of grants

Answer 24

• Difficult to obtain

- Money is often tied to a certain project so can’t be used for anything

Question 25

Describe venture capital

Answer 25

When people or an organisation lends money to a business which is deemed too risky by a bank, in return for equity.

Question 26

Advantages of venture capital

Answer 26

• Start up businesses or businesses with poor credit are still able to obtain finance
• Large amounts of finance can be raised

Question 27

Disadvantages of venture capital

Answer 27

• Ownership is diluted

- Not suitable for small sums of money or for short term purposes

Question 28

Describe crowd funding

Answer 28

When a large amount of people each raise a small amount of finance to fund a new project or business. Often done online via websites such as kickstarter.

Question 29

Advantages of crowd funding

Answer 29

• Money often doesn’t have to be paid back

- Business which banks deem to be too risky can still raise finance

Question 30

Disadvantages of crowd funding

Answer 30

• Success rate is very low

- Whilst advertising business on crowdfunding sites, other businesses may steal ideas and replicate for lower prices

Question 31

Factors to consider when choosing sources of finance

Answer 31

• Finance costs such as interest rates
• How much the business needs
• Short term or long term
• Payback term
• Size of the business
• How much control is retained