internal and external sources of finance

Question 1

internal sources of finance

Answer 1

money available within a business

Question 2

retained profit

Answer 2

profit kept in a business to fund future expenditure

Question 3

advantages of retained profit

Answer 3

no interest charged and available immediately. and only available for the amount already accumulated so avoids debt.

Question 4

disadvantage of retained profit

Answer 4

amount available may be limited, once used it is not available for alternative purchase.

Question 5

net current assets

Answer 5

current assets minus current liabilities shows the money available in the business to fund day to day expenditure

Question 6

advantages of net current assets

Answer 6

encourages business to manage cash flow effectively

Question 7

disadvantages of net current assets

Answer 7

lower stock holding can affect the firms ability to meet customer needs

Question 8

sale of assets

Answer 8

selling an item of worth owned by a business for an immediate cash injection

Question 9

advantages of sale of assets

Answer 9

no interest, could dispose of an asset that is no longer in use to the business, reduces capital tied up in assets making it useful for other purposes

Question 10

disadvantages of sale of assets

Answer 10

it is likely that amount received is not a true reflection of the value of the asset, can increase costs in long run if an asset needs to be leased back.

Question 11

external sources of finance

Answer 11

sources of finance available from outside the business

Question 12

owners capital

Answer 12

money invested in the business from the owner’s personal savings

Question 13

advantages of owners capital

Answer 13

no interest payments/ need to repay, high level of commitment

Question 14

disadvantages of owners capital

Answer 14

amount available is likely to be limited, if more than one owner is could cause friction as everyone might not be able to contribute the same amount

Question 15

loans

Answer 15

money borrowed from a financial institution

Question 16

advantages of loans

Answer 16

regular pre agreed repayments make planning and budgeting really easy, Ownership or control is not lost

Question 17

disadvantages of loans

Answer 17

interest is charged on amount borrowed, interest rates fluctuate, often secured against asset which can be seized if repayments are missed.

Question 18

crowd-funding

Answer 18

involves attracting investments from a large number of speculative investors who may invest relatively small amounts. if all together it matches the amount needed then investments will be collected together

Question 18

advantages of crowd funding

Answer 18

offers ability to to raise finance from large number of investors, no interest is paid as investors will only be rewarded if business is sold.

Question 19

disadvantages of crowd funding

Answer 19

partial loss of ownership, no guarantee that the crowd fund will attract sufficient investments to meet the proposal

Question 20

moartgages

Answer 20

these are long term loans, around 25 years normally and used for purchase of specific item/ asset. eg. a house

Question 21

advantages of mortgages

Answer 21

large amounts of finance can be raised and repaid over a prolonged period of time, ownership or control is not lost.

Question 22

disadvantages of mortgages

Answer 22

interest is charged on amount borrowed, interest rates can fluctuate, often secured against an asset which can be seized if repayments are missed, not suitable for small amounts or short term sources of finance.

Question 23

venture capital

Answer 23

an investment from an experienced entrepreneur in return for equity of the business.

Question 24

advantages of venture capital

Answer 24

finance is provided by a business professional who will often offer advice, mentoring alongside the investment. venture capitalists are risk takers and may see the high potential in high risk investments that other investors like banks may not see.

Question 25

disadvantages of venture capital

Answer 25

partial loss of ownership and control, conflict can arise between entrepreneur and venture capitalist regarding the directions and day-to-day expenditure.

Question 26

debt factoring

Answer 26

involves selling a businesses debts to a third party in order to receive cash quickly,

Question 27

advantages of debt factoring

Answer 27

speeds up flow of cash into business from debts, factor company takes on risk of bad debt.

Question 28

disadvantages of debt factoring

Answer 28

only receive a percentage of amou8nt owed therefore reducing profit, can give wrong impression to customers

Question 29

hire purchase

Answer 29

involves paying to use an asset in installments. property of seller until final payment is done

Question 30

advantagesof hired purchase

Question 31

disadvantages of hire purchase

Question 32

leasing

Answer 32

paying to use an asset in installments and remains in ownership of the supplier throughout the lease agreement.

Question 33

advantages of leasing

Question 34

disadvantages of leasing

Question 35

trade credit

Answer 35

period of time offered by suppliers to allow the customer to purchase a good or service now and pay later.

Question 36

advantages of trade credit

Question 37

disadvantages of trade credit

Question 38

grants

Answer 38

lump sum provided to a business by government or another organisation to be used for a specific purpose.

Question 39

advantages of grants

Question 40

disadvantages of grants

Question 41

donations

Answer 41

sums of money given voluntarily to a charity

Question 42

advantages of donations

Question 43

disadvantages of donations

Question 44

peer-to-peer lending

Answer 44

involves one business person lending money to another business person in return for interest payments

Question 45

advantages of peer-to-peer lending

Question 46

disadvantages of peer-to-peer lending

Question 47

invoice discoutning

Answer 47

reductions offered to customers making product or service cheaper often applied as a percentage

Question 48

advantages of invoice discounting

Question 49

disadvantages of invoice discouting