Finance

Question 1

Give 3 examples of internal sources of finance?

Answer 1

Owners capital
Retained profit
Working capital
Sales of assets

Question 2

What are the advantages and disadvantages of owners capital?

Answer 2

Advantages:
Source doesn’t need to reload and there will be no interest
Disadvantages:
Unlikely the source will be enough to finance the entire business and so high levels of the money being lost/ wasted

Question 3

Define owners capital?

Answer 3

Money the person setting up the business already has saved

Question 4

What is retained profit?

Answer 4

Profit that is kept after dividend is paid

Question 5

What are some advantages and disadvantages of retained profit?

Answer 5

Advantages:
Cheap
Readily available
Does not have any interest as long as profit is made
Disadvantages:
There is an opportunity cost involved

Question 6

Define working capital?

Answer 6

The money that is used to run the business day to day and can be increased by reducing their trade

Question 7

Define sale of assets?

Answer 7

Get money from selling machinery assets etc.

Question 8

What are some advantages and disadvantages of selling assets?

Answer 8

Advantages:
Will bring in lots of money very quickly
Will reduce the cost of running that asset
Disadvantages:
Business will have lost the asset
Smaller businesses are less likely to have unwanted assets

Question 9

What are some advantages and disadvantages of working capital?

Answer 9

Advantages:
Short term source of finance
Can help the business manage its cash flow better
Disadvantages:
Can dent reputation

Question 10

Name five external sources of finance?

Answer 10

Borrowing from family and friends
Bank loans
Overdraft
Trade credit
Factoring
Leasing
Commercial mortgage
Sale and lease back
Share capital
Venture capitalists
Government grants

Question 11

Define borrowing from friends and family as a source of finance?

Answer 11

Where the business borrows money from friends and family- this tends to be informal

Question 12

What are some advantages and disadvantages of borrowing money from friends and family as a source of finance?

Answer 12

Advantages:
Low rates of interest
Easy to negotiate and set up
Immediately available
Disadvantages:
People may fall out over it
If the business fails they will have lost their family and friends capital

Question 13

Define the term bank loans in terms of sources of finance?

Answer 13

Borrowing a fixed amount for a fixed period

Question 14

What are some advantages and disadvantages of using a bank loan as a source of finance?

Answer 14

Advantages:
Once agreed all the money is available immediately
Fixed repayments spread across a long period of time
Disadvantages:
Interest must be paid on top of the total
Banks require proof that the business can repay the debt
Hard for small/ start up businesses to acquire

Question 15

Define the term overdraft?

Answer 15

Facility to withdraw from more than one account than is in an account resulting in a negative balance

Question 16

What are some advantages and disadvantages of using an overdraft as a source of finance?

Answer 16

Advantages:
Flexible way of borrowing
Only pay interest when account is overdrawn
Disadvantages:
Expensive form of borrowing as interest is much higher
May be an arrangement fee

Question 17

Define the term trade credit?

Answer 17

A business buys from its suppliers and pays at a later date

Question 18

What are some advantages and disadvantages of trade credit?

Answer 18

Advantages:
A useful short term source of finance
Usually interest free
Disadvantages:
Suppliers may stop supplying if the business owes too much
Will not benefit from cash discounts
Limited to goods supplied

Question 19

Define factoring?

Answer 19

Where a business sells customer accounts that have outstanding bills to a third party business who will recover this debt

Question 20

What are some advantages and disadvantages of factoring as a source of finance?

Answer 20

Advantages:
The business receives a lesser amount that the original debt
Factoring firm will take responsibility for recovering the money owed to the business
Disadvantages:
The business will not receive the full amount which it was initially owed
Not suitable for a start up business

Question 21

Define leasing?

Answer 21

Where a business pays for the use of assets/ equipment but will never own the asset