Outcome D

Question 1

Why do businesses need finance for

Answer 1

Starting up
Everyday running of the business
Expansion
Internal
Take overs
Equipment

Question 2

Define Internal sources of finance

Answer 2

Come from within the business. This is the finance or capital which is generated internally by the business.

Question 3

How can a business internally finance its business

Answer 3

Retained profit
Net current assets
Sale of assets

Question 4

Retained profits

Answer 4

When a business makes a profit it can decide whether to take that money out of the business as a salary or a dividend similarly they can decide to reinvest it back into the business to expand or buy new equipment etc

Question 5

Advantages of retained profits

Answer 5

No interest charges - companies have more flexibility in deciding how to use the retained profits—whether for growth, paying off existing debts, or improving operations—without worrying about the financial burden of interest
Available immediately- Using retained profits helps maintain financial independence and reduces reliance on external sources of funding, improving the company’s overall financial stability and creditworthiness
Avoids debt - Retained profits help maintain a level of financial stability, especially during economic downturns or periods of low cash flow, as the company isn’t burdened with servicing debt

Question 6

Disadvantages of retained profits

Answer 6

Amount available maybe limited - Shareholders may expect a portion of profits to be distributed as dividends rather than retained for reinvestment. This can reduce the funds available to the business and limit its ability to save for future projects
Once used it cannot be used for other purposes - By using retained profits now, the business might limit its ability to fund future growth opportunities, such as market expansion, product development, or technological advancements
Could cause shareholder dissatisfaction as dividend payment would be reduced - If retained profits are not reinvested wisely or used for growth opportunities, shareholders may question why their dividends were sacrificed, further fueling dissatisfaction

Question 7

Net current assets

Answer 7

Are current assets minus current liabilities. If you have positive net current assets then this can be used by the business to find day to day expenses

Question 8

Advantages of net current assets

Answer 8

Quick way of raising money - Businesses have more control over how and when to utilize their net current assets, allowing for greater flexibility in managing financial challenges or seizing short-term opportunities
Encourages the business to manage its cash flow - A business with well-managed net current assets demonstrates financial discipline and stability, which can build trust with investors, suppliers, and creditors

Question 9

Disadvantages of net current assets

Answer 9

May have to set lower prices to sell through stock quicker - means the business sacrifices potential revenue that could have been earned if the stock were sold at its full value
Holding less stock could impact availability - If products are not readily available, customers may turn to competitors, resulting in lost sales and potentially damaging long-term customer relationships
Short credit terms can ruin relationships with customers - Enforcing strict or short credit terms could damage your reputation within the industry, making it harder to attract new customers or retain existing ones

Question 10

Sale of assets

Answer 10

A business can sell assets that they have in order go receive a cash load. For example, the business could have land, property or machinery that it could sell and then use that cash to invest in something else that may be useful to the business

Question 11

Advantages of sale assets

Answer 11

No interest charged - Asset sales are straightforward, requiring no complicated financing agreements or interest calculations, making them easier to manage and less risky in terms of future obligations
Good way of raising funds from assets no longer needed - Selling assets can generate immediate cash, which can be used to cover operational costs, pay down debt, or invest in other opportunities, improving liquidity and financial flexibility

Question 12

Disadvantages of sale of assets

Answer 12

May not receive full value of the asset if a quick sale is needed - By selling the asset for less, the business forfeits the potential future value it might have gained by holding on to it longer.
If the asset is needed then costs increase to lease a similar asset back - Leasing back an asset can result in ongoing, recurring costs that may add up over time, making it more expensive than retaining ownership of the asset in the long term

Question 13

External sources of finance

Answer 13

Owner’s capital
Crowd funding
Loans
Mortgages
Venture capital
Debt factoring
Hire purchase
Leasing
Trade credit
Grants
Donations
Peer to peer lending
Invoice discounting

Question 14

Owner’s capital

Answer 14

From the owner’s personal finances and is used to finance the business
Although this person owns the business it is still classed as an external source of finance as it comes from outside of the business it self

Question 15

Advantages of owner’s capital

Answer 15

No interest payments - which saves the business money that can be reinvested into operations or growth
No repayment schedule - reduces financial pressure on the business. This allows the owner to focus on growing the business without the burden of meeting strict deadlines for repayment
No loss of ownership - All profits generated by the business remain with the owner, as there are no investors or shareholders expecting dividends or returns on their investment

Question 16

Disadvantages of owner’s capital

Answer 16

Limited amount available - The amount of capital an owner can invest is limited by their personal savings and financial resources. This may not be sufficient to meet the business’s funding needs, particularly for large-scale projects or expansions
Personal finances are at risk - When an owner invests their own money into the business, they risk losing personal savings if the business fails or underperforms. This could leave them with limited funds for personal needs, emergencies, or future plans
Could cause friction between owners if all are not able to contribute the same amount - which can result in disagreements over decision-making power, profit sharing, and control of the business

Question 17

Loan

Answer 17

Money lent to an individual or business that is paid off with interest over an agreed period.

This means that the business knows in advance what the cost of borrowing will be and what monthly repayments will be required.

The bank may require the business to secure its assets against the loan. This means that if the business is unable to repay the loan, the bank can demand the sale of assets to raise money to pay back the loan

Question 18

Advantages of loans

Answer 18

Easy to budget as repayments are pre arranged - meaning the borrower knows exactly how much they need to pay and when. This predictability helps with planning personal or business finances effectively

No loss of ownership - This ensures that the original owners maintain complete control over the business and its future direction

Question 19

Disadvantages of a loan

Answer 19

Interest charged - which can significantly increase the total repayment amount over time
Usually secured against an asset that could be seized if loan is not repaid - If the borrower is unable to meet repayment obligations, the lender has the legal right to seize the asset to recover their losses, which can result in the loss of essential or valuable property
Show financial statements to banks to secure loan - Banks often require detailed financial statements, including income statements, balance sheets, and cash flow statements, to assess the borrower’s creditworthiness. Preparing and providing these documents can be a lengthy process

Question 20

Crowd funding

Answer 20

Involves many people investing small amounts of money in a business, usually online.
It provides opportunities for individuals to start up a business even id they don’t have access to other sources of funding
It can be difficult to reach the funding target

Question 21

Advantages of crowd funding

Answer 21

No interest paid - which reduces the financial burden on the business or individual
Finance received from a number of investors - a large number of investors or backers contribute smaller amounts of money, spreading the financial responsibility across many individuals rather than relying on one major investor or lender
Gauges people’s interest in the business - A successful crowdfunding campaign demonstrates that there is genuine interest and demand for the product or service. If people are willing to invest in the idea, it’s a strong indicator of its potential success in the market

Question 22

Disadvantages of crowd funding

Answer 22

Partial loss of ownership - By giving up equity, future profits must be shared with the investors, reducing the original owner’s share of the business earnings
May not reach your crowd funding target as interest in the business may not be there - can harm your business’s reputation or brand, as it may signal to future investors or customers that your idea lacks viability or public interest
someone could steal your idea from the crowdfunding platform - Once your idea is shared online, you lose some control over who sees it and how it’s used. Competitors or opportunistic individuals may use this information to create similar products and potentially undermine your business before it even gets off the ground

Question 23

Advantages of mortgages

Answer 23

Large amounts of finance can be acquired and then repaid over a long period of time - This extended repayment term means borrowers don’t have to pay the entire loan balance upfront, easing the financial burden
No loss of ownership or control - mortgage holders have the freedom to make decisions about the property, including renovations, improvements, or changes in its use, without seeking permission from a third party

Question 24

Disadvantages of a mortgage

Answer 24

Interest charged on amount borrowed - means that the borrower ends up paying significantly more than the original amount borrowed. For example, on a 30-year mortgage, the interest can sometimes double the total cost of the home by the time the loan is fully repaid
Secured against an asset that could be seized - If a borrower experiences financial difficulties, such as a job loss, illness, or other unexpected expenses, they may struggle to keep up with mortgage payments. Not only does the borrower lose the property, but it could also severely impact their financial stability, leaving them without an asset and with a damaged credit score
Not suitable as a short term source of finance - significant upfront costs, such as deposit requirements, arrangement fees, and legal expenses. These costs make mortgages impractical for borrowers seeking quick, short-term funding solutions for temporary needs

Question 25

Venture capital

Answer 25

Is money invested by an individual or group that is willing to take the risk of funding a new business Im exchange for an agreed share of the profits.

The venture capital will want a return on their investment as well as input into how the business is run.

Venture capital is money that investors provide to a company that is starting up or expanding. Venture capital is usually used when there is an element of risk with the business.

Question 26

Advantages of venture capital

Answer 26

Finance is made available along with advice and mentoring - Venture capitalists bring experience and industry knowledge to the table. They can provide guidance on strategic planning, market positioning, and operational efficiency, helping businesses navigate challenges and make informed decisions
Finance may be easier to obtain as venture capitalists are usually high risk high reward people - If your business plan demonstrates a strong likelihood of scaling and generating substantial profits, VCs are more likely to provide funding

Question 27

Disadvantages of venture capital

Answer 27

Loss of ownership and control - capitalists often expect a say in the company’s strategic decisions. This can lead to the founders losing the right over key areas, such as business direction, operational priorities, or product development
Conflicts may occur over the direction of the business - Founders and venture capitalists may have different long-term goals. While founders may prioritize building a sustainable or socially impactful business, VCs are often focused on achieving rapid growth and high returns, which can lead to conflicts about strategy and priorities

Question 28

Debt factoring

Answer 28

Involves a business selling their invoices to a third party at a discounted price in order to bypass the waiting times which are associated with invoice payments

This means they receive the money they are owed quickly however it comes at a cost as they get a discounted amount of debt factoring company

Question 29

Advantages of debt factoring

Answer 29

Improves the businesses cash flow - Debt factoring allows a business to receive a significant percentage of the value of its invoices upfront from a factoring company. This improves cash flow by providing immediate funds instead of waiting for customers to pay
Reduced risk of default on payments- In times of economic uncertainty, when customers may delay payments, debt factoring provides a reliable way to maintain liquidity and reduce exposure to payment risks

Question 30

Disadvantages of debt factoring

Answer 30

Only receive a percentage of the amount the business is owed - The portion of revenue lost to the factoring company represents money that could have been reinvested into the business for growth, used to pay off other debts, or saved for future needs
Can alienate customers -n Customers may perceive the use of a factoring company as a sign that the business is struggling financially or lacks confidence in its ability to manage credit. This could undermine trust and confidence in the business

Question 31

Hire purchase

Answer 31

Used to purchase an asset, such as a delivery van or piece of equipment

A deposit it paid and the remaining amount is paid in monthly instalments over a set period. The business does not own the item until all payments are made

Question 32

Advantages of hire purchase

Answer 32

Regular payments are good for budgeting - This predictable schedule allows businesses and individuals to plan their finances more effectively, knowing exactly how much they need to allocate each month
Avoids paying a large lump sum - By avoiding a large upfront payment, businesses and individuals can preserve their cash reserves for other purposes, such as covering operational expenses, unexpected costs, or investments in other areas

Question 33

Disadvantages of hire purchase

Answer 33

Likely to cost more than buying the asset outright - In a hire purchase agreement, the cost of the asset is spread over monthly installments, which include interest. This means that, over the repayment period, the total amount paid is significantly higher than the original price of the asset
Only suitable for lower cost items such as vehicles not land or buildings - These items are typically more affordable and have a clear, measurable value, which makes them suitable for this type of financing

Question 34

Leasing

Answer 34

A way of renting an asset that the business requires

Monthly payments are made, and the leasing company is responsible for the provision and upkeep of the leased item

Unlike hire purchase the item is not owned at the end of the payments by the business

Question 35

Advantages of leasing

Answer 35

Maintenance and repairs are the responsibility of the supplier - the leaser doesn’t have to worry about the costs associated with maintaining the asset. This can significantly reduce unexpected expenses and provide a more predictable budget for the business
Spreads the cost of the asset rather than paying a lump sum - making it easier to budget and plan for the cost of the asset over time. This provides financial predictability and allows businesses to allocate their resources more effectively

Question 36

Disadvantages of leasing

Answer 36

Likely to cost more than buying outright - Lease agreements often come with interest rates and additional fees.This means that, over the repayment period, the total amount paid is significantly higher than the original price of the asset
Never actually own the asset so the payments are ongoing - Since leasing involves continuous payments, the individual or business must keep making payments for as long as they wish to use the asset. This creates a long-term financial obligation, (unlike ownership, where payments are completed once the asset is paid off)

Question 37

Trade credit

Answer 37

Must be agreed with a supplier and forms a credit agreement with them. This source of finance allows a business to obtain raw materials and stock but pay for them later

Question 38

Trade credit continued:
Common terms and conditions of a credit agreement include:

Answer 38

Credit limit - max amount of credit available to the business
Credit period - the length of time the business has to pay what is owed, usually 30,60, or 90 days
Frequency of payment - how often payment is required, usually monthly
Method of payment - the way in which the business makes payment.
Retrospective discount - a discount given when the business has purchased a certain amount of stock or raw materials

Question 39

Advantages of trade credit

Answer 39

Helps with cash flow due to delayed payments - Trade credit allows businesses to purchase goods or services and pay for them at a later date, typically 30, 60, or 90 days after receiving the products. This delayed payment provides businesses with more time to generate revenue from the sale of those goods or services before having to settle the debt, improving overall cash flow
No loss of ownership and control - trade credit enables businesses to maintain their current organizational structure, which is crucial for those who want to avoid complications or changes in their leadership

Question 40

Disadvantages of trade credit

Answer 40

Short term source of finance - While trade credit provides immediate relief, the source of finance is temporary, and once the credit period ends, the business must pay the outstanding balance, which can create cash flow pressures
Lose discounts for paying cash

Question 41

Grants

Answer 41

A fixed amount of money usually awarded by the gov, EU or charitable organisation

Grants are given to a business on the condition that they meet certain criteria such as providing jobs in areas of high unemployment

Question 42

Advantages of grants

Answer 42

Does not need to be repaid - This eliminates the risk of accumulating debt or facing the pressure of making regular repayments, which can be especially beneficial for startups or non-profit organizations with limited financial resources
No interest payments - Without the obligation to pay interest or repay the principal, grants reduce the financial risk for recipients. This is particularly valuable for organizations or individuals who may not yet have a steady income or want to avoid taking on debt
No loss of ownership or control - Since grants do not require repayment or equity, funders typically do not have any direct influence over the business’s operations or strategies. This allows the recipient to run their business or project, without external pressures or obligations to investors

Question 43

Disadvantages of grants

Answer 43

Have to meet certain conditions - Grants often come with strict eligibility criteria that applicants must meet to qualify. These conditions may include specific industry focus, location, or project type, which can restrict who can apply and whether the grant is accessible for a wide range of businesses or individuals
Takes a long time to apply - This can take weeks or even months to complete, slowing down the ability to secure funding quickly

Question 44

Donations

Answer 44

These are an important source of finance for non profit organisations such as charity or societal enterprise

Donations are relied upon for the continual running and day to day upkeep of such organisations

Question 45

Advantages of donations

Answer 45

No interest charged - This is particularly beneficial for non-profits, charities, or individuals who may not have the capacity to repay borrowed funds or handle high interest
No loss of ownership or control - Unlike investments or loans that may require giving up shares in the organization, donations are provided without any expectation of ownership in return. This allows the recipient to maintain full control over their operations, decision-making, and strategic direction
No need to repay - Unlike loans, donations do not require repayment, meaning the recipient does not have to worry about future financial obligations or accumulating debt

Question 46

Disadvantages of donations

Answer 46

Not reliable - During times of economic uncertainty or downturns, potential donors may reduce or stop their contributions. This can leave organizations or projects that rely on donations in an uncertain financial position
Usually received in small amounts - Donations are often unpredictable and vary in size, making it difficult to rely on them as a stable or consistent source of income, particularly for organizations that need regular funding to maintain operations

Question 47

Peer to peer lending (P2P)

Answer 47

a way for people to lend money to individuals or businesses
The lender lends their money to an organisation of individual. In return the lender receives interest on top of the amount lent out

Question 48

Advantages of P2P

Answer 48

Interest rates can be lower than a traditional benefit -P2P lending platforms operate primarily online, which reduces administrative and facility costs. These savings are often passed on to borrowers in the form of more competitive interest rates
Easier to budget as repayments are at a fixed rate - P2P lending agreements involve fixed interest rates and consistent monthly repayments throughout the loan term. This eliminates the uncertainty of fluctuating payments that can occur with variable-rate loans, making it easier to plan finances

Question 49

Disadvantages of p2p lending

Answer 49

Amount available to borrow may be limited - P2P platforms impose a maximum loan limit to reduce risk for investors and ensure loans remain manageable. This cap can make P2P lending unsuitable for borrowers who need substantial funding, such as businesses requiring large-scale capital for expansion or individuals financing major purchases like property
Short term source - P2P lending platforms often offer loans with shorter repayment periods, typically ranging from a few months to a few years. This makes them less suitable for long-term projects or investments, such as purchasing property, funding extensive business expansions, or financing large infrastructure projects

Question 50

Invoice discounting

Answer 50

A form of short term borrowing against your outstanding invoices. It is usually used to help improve a company’s working capital and cash flow position

Invoice discounting gives you access to the money in unpaid customer invoices much faster. Instead of waiting for your customers to pay your invoices discounting the company

These companies will lend you up to 95% of the value of the invoices, paying you the money in a matter of days rather than weeks. Once you receive payment from your customers, you pay back the loan.

Question 51

Advantages of invoice discounting

Answer 51

No need to repay - Invoice discounting involves selling unpaid invoices to a third-party provider for a percentage of their value. Since the business is just accessing funds that are already owed to it, there is no loan or debt created, eliminating the need for repayment
No interest charged - Instead, businesses only pay a fee for the service, which is usually a small percentage of the invoice value. This can make it a more affordable option for businesses that need quick access to funds
Reduces costs to the business - Instead of waiting for customers to pay (which can take weeks or months), the business can receive a percentage of the invoice value upfront, improving cash flow and allowing for better management of day-to-day operations

Question 52

Disadvantages of invoice discounting

Answer 52

Negatively impacts cash flow - if customers delay their payments or default on invoices, the business still faces the risk of paying the fees or interest on amounts that have not yet been collected, potentially leading to cash flow problems
Often only available if purchases are paid in cash - If customers use credit or deferred payment terms, the business may not be able to discount those invoices, reducing the amount of available financing

Question 53

What is venture capital

Answer 53

capital invested in a project in which there is a substantial element of risk, typically a new or expanding business.