Learning Outcome D: Select and evaluate different sources of business finance

Question 1

Source of finance

Answer 1

Where money comes from

Question 2

What determines which source of finance is most suitable?

Answer 2

What the money is for

Question 3

True/False: Sources of finance are only long-term

Answer 3

False, they can be short-term or long-term

Question 4

What is meant by a short-term loan?

Answer 4

A loan that needs to be paid back in one year

Question 5

What is meant by a long-term loan?

Answer 5

A loan that needs to be paid back in a period of time greater than one year

Question 6

Internal sources of finance

Answer 6

Money available to fund expenditure from within the business

Question 7

Give 3 examples of internal sources of finance

Answer 7

Retained profit, net current assets and sale of assets

Question 8

Retained profit

Answer 8

Profit (sales revenue minus total costs) kept in the business to fund future expenditure

Question 9

Net current assets

Answer 9

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

Question 10

Sale of assets

Answer 10

Selling an item of worth owned by a business in order to achieve an immediate cash injection

Question 11

Give 2 advantages of retained profits as an internal source of finance

Answer 11

Any 2 from no interest charges, available immediately, only available up to the amount already accumulated by the business and therefore avoids debt and no loss of ownership (control

Question 12

Give 2 disadvantages of retained profits as an internal source of finance

Answer 12

Any 2 from amount available may be limited, reduces payments to shareholders which may cause dissatisfaction and once used it is not available for alternative purposes

Question 13

Give an advantage of net current assets as an internal source of finance

Answer 13

Encourages the business to manage cash flow effectively

Question 14

Give a disadvantage of net current assets as an internal source of finance

Answer 14

Any from can put pressure on customers as shorter credit terms are offered and this negatively affects relationships with suppliers if longer credit terms are negotiated and lower stock holdings can affect the firm’s ability to meet customer needs

Question 15

Give 2 advantages of sale of assets as an internal source of finance

Answer 15

Any 2 from no interest charges, reduces capital tied up in assets, releasing it for other purposes and can mean disposing of an asset no longer of use to the business

Question 16

Give a disadvantage of sale of assets as an internal source of finance

Answer 16

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

Question 17

External sources of finance

Answer 17

Those available from outside the business

Question 18

Outline owner’s capital as an external source of finance

Answer 18

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

Question 19

Outline loans as an external source of finance

Answer 19

Loans are money borrowed from a financial institution normally for a set period of time and for a specific purpose. Interest will be payable on the loan

Question 20

Outline crowd-funding as an external source of finance

Answer 20

This involves attracting investment from a large number of speculative investors many of whom may invest relatively small amounts. If cumulatively this matches the required amount then the investments are collected together. Normally makes use of the internet to attract investors

Question 21

Outline mortgages as an external source of finance

Answer 21

These are long-term loans, normally around 25 years, that are secured against a specific asset, for example a building. Interest will be payable on the mortgage

Question 22

Outline venture capital as an external source of finance

Answer 22

This is investment from an experienced entrepreneur in return for a stake (equity) in the business

Question 23

Outline debt factoring as an external source of finance

Answer 23

This involves the selling on of a business’s debts to a third party in order to receive the cash quickly. The factor company pays the business a percentage of the money owed and takes on the responsibility to chase the debts which need to be repaid

Question 24

Outline hire purchase as an external source of finance

Answer 24

This involves paying to use an asset in instalments to spread the cost over its useful life and hence provide a source of finance. The asset will remain the property of the seller until the final instalment has been paid

Question 25

Outline leasing as an external source of finance

Answer 25

This involves paying to use an asset in instalments to spread the cost over its useful life and hence providing a source of finance. Ownership of the asset stays with the supplier throughout the length of the lease agreement.

Question 26

Outline trade credit as an external source of finance

Answer 26

This is a period of time offered by suppliers to allow the customer to purchase a good or service now and pay at a later date, for example 30 days after purchase

Question 27

Outline grants as an external source of finance

Answer 27

This is a lump sum provided to a business by the government or another organisation to be used for a specific purpose. For example, it could be used to provide employment in a deprived area or invest in the research and development of an environmentally friendly alternative to fossil fuels

Question 28

Outline donations as an external source of finance

Answer 28

These are sums of money given voluntarily to charity or social enterprise

Question 29

Peer-to-peer lending

Answer 29

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

Question 30

Invoice discounting

Answer 30

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

Question 31

Give an advantage of owner's capital as an external source of finance

Answer 31

Any from no interest payments or need to repay and high level of commitment from the owner

Question 32

Give a disadvantage of owner's capital as an external source of finance

Answer 32

Any from amount available is likely to be limited and if there is more than one owner this could cause friction if everyone is not able to contribute the same amount

Question 33

Give an advantage of loans as an external source of finance

Answer 33

Any from regular pre-agreed repayments make planning and budgeting relatively easy and ownership or control is not lost

Question 34

Give 3 disadvantages of loans as an external source of finance

Answer 34

Any 3 from interest is charged on the amount borrowed, interest rates can fluctuate, often secured against an asset which can be seized if repayments are missed and interest has to be paid regardless of whether a profit is being made

Question 35

Give an advantage of crowd-funding as an external source of finance

Answer 35

Any from offers the ability to raise finance from a large number of investors and no interest is paid as investors will only be rewarded if the business is successfully sold on at a later date

Question 36

Give a disadvantage of crowd-funding as an external source of finance

Answer 36

Any from partial loss of ownership and no guarantee that the crowd fund will attract sufficient investment to meet the proposal

Question 37

Give an advantage of mortgages as an external source of finance

Answer 37

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

Question 38

Give 3 disadvantages of mortgages as an external source of finance

Answer 38

Any 3 from interest is charged on the amount borrowed, interest rates can fluctuate, often secured against an asset which can be seized if repayments are missed, interest has to be paid regardless of whether a profit is being made and not suitable for small amounts or as a short-term source of finance

Question 39

Give an advantage of venture capital as an external source of finance

Answer 39

Any from finance is provided by a business professional who will often offer advice and mentoring alongside the investment and venture capitalists are often risk takers and may see the potential in a high risk investment that other investors including banks may not be willing to invest in

Question 40

Give a disadvantage of venture capital as an external source of finance

Answer 40

Any from partial loss of ownership and control and conflict can arise between the entrepreneur and venture capitalist regarding the direction and day-to-day running of the business

Question 41

Give an advantage of debt factoring as an external source of finance

Answer 41

Any from speeds up the flow of cash into the business from debts and the factor company takes on the risk of bad debt

Question 42

Give a disadvantage of debt factoring as an external source of finance

Answer 42

Any from only receive a percentage of the amount owed, therefore reducing profits and can give the wrong impression or alienate customers

Question 43

Give 2 advantages of hire purchase as an external source of finance

Answer 43

Any 2 from avoids the need to pay a lump sum for the use of an asset, regular instalments make planning and budgeting easier and spreads the cost of an asset over its useful life

Question 44

Give a disadvantage of hire purchase as an external source of finance

Answer 44

Any from overall amount paid for the use of an asset is likely to be higher than if purchased outright and only really suitable for relatively low cost assets, e.g. vehicles and not premises

Question 45

Give an advantage of leasing as an external source of finance

Answer 45

Any from responsibility for maintaining and repairing the asset stays with the supplier and spreads the cost of an asset over its life to avoid paying a lump sum up from

Question 46

Give a disadvantage of leasing as an external source of finance

Answer 46

Any from overall amount paid for the use of an asset is likely to be higher than if purchased outright and never actually own the asset and therefore payments are ongoing

Question 47

Give an advantage of trade credit as an external source of finance

Answer 47

Any from delays the need to pay for goods and services purchased, therefore aiding cash flow and no loss of ownership or control

Question 48

Give a disadvantage of trade credit as an external source of finance

Answer 48

Any from potential loss of discounts offered for cash payments and only suitable as a short-term source of finance

Question 49

Give an advantage of grants as an external source of finance

Answer 49

Any from no need to repay and no interest charges and no loss of ownership or control

Question 50

Give a disadvantage of grants as an external source of finance

Answer 50

Any from often require a lengthy application process and might only be awarded if certain conditions are met affecting the way the business operates on a day-to-day basis

Question 51

Give an advantage of donations as an external source of finance

Answer 51

Any from no need to repay and no interest charges and no loss of ownership or control

Question 52

Give a disadvantage of donations as an external source of finance

Answer 52

Any from likely to be small amounts only and unpredictable

Question 53

Give an advantage of peer to peer lending as an external source of finance

Answer 53

Any from interest rates can be lower than lending from more traditional financial institutions and fixed rate of interest can be agreed making it easier to plan and budget

Question 54

Give a disadvantage of peer to peer lending as an external source of finance

Answer 54

Amounts available may be limited and provided for a short period of time only

Question 55

Give 2 advantages of invoice discounting as an external source of finance

Answer 55

Any from no need to repay and no interest charges, no loss of ownership or control and reduces costs to the business so increases profit

Question 56

Give a disadvantage of invoice discounting as an external source of finance

Answer 56

Often only available if purchases are paid in cash which affects cash flow

Question 57

Retained profit is an internal/external source of finance

Answer 57

internal

Question 58

Net current assets is an internal/external source of finance

Answer 58

internal

Question 59

Sale of assets is an internal/external source of finance

Answer 59

internal

Question 60

Owner's capital is an internal/external source of finance

Answer 60

external

Question 61

Loans are an internal/external source of finance

Answer 61

external

Question 62

Crowd-funding is an internal/external source of finance

Answer 62

external

Question 63

Mortgages are an internal/external source of finance

Answer 63

external

Question 64

Venture capital is an internal/external source of finance

Answer 64

external

Question 65

Debt factoring is an internal/external source of finance

Answer 65

external

Question 66

Hire purchase is an internal/external source of finance

Answer 66

external

Question 67

Leasing is an internal/external source of finance

Answer 67

external

Question 68

Trade credit is an internal/external source of finance

Answer 68

external

Question 69

Grants are an internal/external source of finance

Answer 69

external

Question 70

Donations are an internal/external source of finance

Answer 70

external

Question 71

Peer-to-peer lending is an internal/external source of finance

Answer 71

external

Question 72

Invoice discounting is an internal/external source of finance

Answer 72

external