Finance

Question 1

All the sources of finance 11 of them

Answer 1

Hire purchase 
Trade credit 
Mortgage 
Bank loans 
Profit retention 
Government grant
Selling assets 
Owners funds 
New share issue 
Overdraft
Family friends loan

Question 2

Friends and family loan advantage and disadvantage

Answer 2

advantage

Flexible about repayments and may not charge interest

disadvantage

May only be able to lend a small amount

Family and friends will depend on their trust in the business owner but may want to see details of the business plan too

Question 3

Retained profit

Answer 3

advantage

No need to pay interest

Available immediately

disadvantage

Could have been invested elsewhere, earning a higher profit

The business may not have sufficient retained profit to meet its needs

Shareholders may become unhappy if this reduces dividends payments

Question 4

Established businesses often need to raise finance for a number of reasons list some

Answer 4

To expand
To improve efficiency - train employees or technology to use in production
To develop new products

Question 5

bank loan

Answer 5

advantages

Easy and quick to set up
Small or large amounts of money can be borrowed
Structured repayment terms

disadvantages

Interest payable
If repayments cannot be kept up, business risks getting a poor credit rating and/or being made bankrupt
Want to see a cash flow forecast and business plan

Question 6

mortgage

Answer 6

advantage

Often with a fixed rate of interest

Repayments every month

disadvantage

May have a variable interest rate which can become expensive if the rate rises

Lenders may insist on security (collateral)

The legal deeds of the property must be shown to the lender and may be kept by the lender until the mortgage is paid

Question 7

overdraft

Answer 7

advantage

Very quick to arrange

Only pay interest on the amount overdrawn

A good short term solution to a cash flow problem

disadvantage

Only suitable for small amounts

Interest or charges are paid and have to be repaid in a short amount of time

Cash flow forecasts will need to be shown each time the
overdraft arrangements is rearranged

Usually a high rate of interest - expensive SoF

A bank may withdraw an overdraft with little notice

Question 8

trade credit

Answer 8

advantage

Gives the business more cash to use in the immediate future

Does not incur interest charges

Bills usually have to be settled within 30, 60, or 90 days

disadvantage

Can only be used to buy certain goods

Discounts for immediate or quick repayments are lost

References from the bank and possible other suppliers and possible cash flow forecast

Short term solution

Relatively small sums of money can be raised in this way

Question 9

government grant

Answer 9

advantage

Doesn’t have to be paid back

disadvantage

Many businesses do not qualify for them

Many forms have to be filled out to prove the business is eligible for the grant, meet conditions

Businesses may have to invest money alongside the grant