Raising finance 2.1

Question 1

What is an external source of finance?

Answer 1

An external source of finance raises money through third parties and they usually charge interest so it costs more.

Question 2

What is share capital?

Answer 2

A business giving away a percentage of their business in return for finance

Question 3

What is trade credit?

Answer 3

Buying something now and the paying for it later

Question 4

What is venture capital?

Answer 4

A business giving away a percentage of their business in exchange for finance and good business knowledge capable of expanding the business.

Question 5

What is a grant?

Answer 5

When the government gives money to businesses in order to help fund for projects.

Question 6

What is a loan?

Answer 6

Borrowing money from a bank and then paying interest when paying it back.

Question 7

What is leasing?

Answer 7

When a leasing company claims the capital allowances and the business customer pays business charges.

Question 8

What is a overdraft?

Answer 8

Short-term loan when a business’s account goes past 0. Only pay interest when the account goes into overdraft.

Question 9

Sources of finance include…

Answer 9

Family and friends, banks, other businesses, business angels, peer-to-peer funding and crowdfunding.

Question 10

What does it mean for a business to have limited liabilities?

Answer 10

the most an investor can lose from the original amount that they invested

Question 11

What does it mean for a business to have unlimited liabilities?

Answer 11

The owner is legally responsible for any debts

Question 12

Types of enterprises that have limited liability.

Answer 12

Private limited companies, Public limited companies and co-operatives

Question 13

Types of enterprises that have unlimited liability?

Answer 13

Partnerships and sole traders

Question 14

What sources of finance can limited liability companies get?

Answer 14

Grants, trade credit, leasing, overdraft, loans (to a certain extent), retained profit, sale of assets and share capital.

Question 15

Define internal sources of finance

Answer 15

The money that is created/raised within a business

Question 16

What are personal savings? Pros and Cons

Answer 16

Savings from the business owner that they have invested into the company. It is good because enough money may have been saved and potential to earn interest however can be risky if they do not have a significant amount to fund extra costs.

Question 17

What does it mean by selling assets? Pros and Cons

Answer 17

Selling assets (machinery etc) for cash. It is cheap but it can harm business operations

Question 18

What are personal profits? Pros and Cons

Answer 18

The profit a business has effectively saved whilst it has been operating. Quick way of sourcing finance however may not be enough as it is only profits.

Question 19

What is meant by business planning?

Answer 19

Creating a business plan including cash flows, net, opening and closing balance in order to determine how much turnover a business will make over a given period of time.

Question 20

What is a cash flow forecast?

Answer 20

Predicts how much money a business will have at its disposal over a given period of time.

Question 21

Deter the importance of managing cash flow

Answer 21

To know if businesses need to arrange any financial support, be able to pay off any debts, to ensure a positive cash flow, review timings of receipts and to have enough working capital.

Question 22

To what extent are cash flow reliable?

Answer 22

They are only useful on the estimates that they are based upon. Businesses must question scenario such as: if customers don’t pay in time or if sales are low.

Question 23

2 Benefits of cash flow forecast.

Answer 23

To foresee any areas where there will be a shortfall in cash flow and so to make advance arrangements on sources of finance, banks more likely to accommodate overdraft/loans is business shows good cash flow.

Question 24

3 limitations of cash flow forecast.

Answer 24

Based on assumption, need to pay for unexpected expenses, demand change (inflation, higher wage or recession)

Question 25

What is debt factoring?

Answer 25

Debt factoring is when a firms pays around 90% of a businesses debt. Quick method