finance unit

Question 1

what is a bank overdraft

Answer 1

Allows a business to overdraw an amount of money from their bank account

Question 2

advantages of a bank overdraft

Answer 2

• Easy to set-up
• Quick to access finance

Question 3

disadvantages of a bank overdraft

Answer 3

Must be paid back quickly or can be expensive due to high interest rates

Question 4

what sources of finance would be used in private sector

Answer 4

• bank overdraft
• government grant
• retained profits
  -leasing
  -bank loan
• share issue
• mortgage

Question 5

what sources of finance would be used in third sector

Answer 5

• government grant
• retained profits
  -bank loan

Question 6

what is a government grant

Answer 6

A government grant is finance granted to a business from the government. This is often given to encourage entrepreneurs to start up a new business or open a business in a particular area

Question 7

advantages of a government grant

Answer 7

Provides finance which does not have to be repaid

Question 8

disadvantages of a government grant

Answer 8

• One off payments
• Will have criteria the business must fulfil in order to obtain the grant e.g. provide employment in an area

Question 9

what is retained profits

Answer 9

This is when a business saves a portion of its profits and reinvests back into the company.

Question 10

advantages of retained profits

Answer 10

Profits belong to the company, so owner is in control

Question 11

disadvantages of retained profits

Answer 11

• Relying on profits is risky, as some months a business may not make profits
• May run out of retained profits quickly

Question 12

what is leasing

Answer 12

A business can lease (or rent) vehicles or machinery from another company. They pay a monthly fee and the leasing company takes care of the maintency.

Question 13

advantages of leasing

Answer 13

• The leasing company will repair and maintain the machinery which saves the business costs.
• If a business has limited finance this does not require a large initial payment

Question 14

disadvantages of leasing

Answer 14

• The business will never own the asset
• In the long run the monthly costs will total to more than it would have cost to buy the asset outright.

Question 15

what is a bank loan

Answer 15

A bank loan is when a financial institution such as a bank or building society will lend a business money over a set period of time. Usually 5 to 20 years.

Question 16

advantages of a bank loan

Answer 16

• Payments are in regular fixed instalments
• This makes it easier for the business to budget

Question 17

disadvantages of a bank loan

Answer 17

• Interest must be paid along with the amount borrowed
• Small business tend to pay higher interest rates

Question 18

what is a share issue

Answer 18

Selling more shares raises capital for the business

Question 19

advantages of share issue

Answer 19

• Large sums of money can be raised
• This does not need to be paid back

Question 20

disadvantages of share issue

Answer 20

• More shareholders means more dividends (profits are shared)
• Selling shares may result in less control of the business

Question 21

what is a mortgage

Answer 21

A loan from the bank which can only be used to buy property. This is paid back in monthly installments.

Question 22

advantages of a mortgage

Answer 22

• The business can borrow a large sum of money over a long period of time e.g. 25 years.
• Monthly payments are agreed with the bank which makes it easier for the business to budget.

Question 23

disadvantages of a mortgage

Answer 23

Interest has to be paid on top of repaying the mortgage.

Question 24

what is a fixed cost

Answer 24

These are the expenses the business incurs which do not change with output.

Question 25

what is a variable cost

Answer 25

These are the expenses which change according to the level of output, therefore, the more the business produces the higher the variable costs will be.

Question 26

examples of fixed costs

Answer 26

• rent
• advertising
• rates
• salaries

Question 27

examples of variable costs

Answer 27

• raw materials
• electrisity