Paper 1 Divider 14

Question 1

Internal sources of finance, retained profit

Answer 1

Money kept in the business by the owners

• adv: no debt, incurs interest
• disad: high interest rate at the bank

Question 2

External sources of finance, bank loan

Answer 2

Amount is borrowed from the bank and repaid

• adv: easy and quick to set up
• disad: repayment problems can be caused

Question 3

External sources of finance, share capital

Answer 3

A share in the business is sold to an individual/business then used to purchase new assets

• adv: no debt, no repayments
• disad: dividends have to be paid back

Question 4

External sources of finance, debt factoring

Answer 4

The company sells a debt owed to a debt factoring company who pays the business a smaller sum than they were owed

• adv: reduces the risk of bad debts
• disad: takes a long time to arrange

Question 5

External sources of finance, overdraft

Answer 5

The bank allows the business to draw more mone from their bank account than they actually have in it

• adv: helps cash flow, quick easy to obtain
• disad: high interest charges

Question 6

External sources of finance, venture capital

Answer 6

Invest in small risky business

• adv: if the VC is experienced and specialist in business area then they will succeed
• disad: risky for the VC

Question 7

Short term finance

Answer 7

Day to day operations

Overdraft, trade credit, hire purchasing

Question 8

Short term finance adv

Answer 8

-overdraft= bank may want paying quickly and resolve cash flow problems

Question 9

Short term finance disad

Answer 9

-more risky, can be expensive and need paying quickly, difficulties

Question 10

Long term finance

Answer 10

Provide finance over many years, more than 5

Bank loan, retained profit, venture capital, share capital

Question 11

Long term finance adv

Answer 11

-bank loan for new asset, repayable, over a number of years

Question 12

Long term finance disad

Answer 12

• debt is more risky

- long term needed for larger amounts