Raising finance 2.1

Question 1

What is internal finance?

Answer 1

Finance that comes from inside of the business

Question 2

Why would a business need to raise finance?

Answer 2

-Growth
-Capital expenditure
-Revenue expenditure

Question 3

What are the three sources of internal finance?

Answer 3

Owner capital
Retained profit
Sale of assets

Question 4

What are three advantages of internal finance?

Answer 4

-Internal finance is often free (no interest rates)
-Does not involve third parties that may influence business decisions
-Internal finance can be raised quickly without paperwork

Question 5

What are three disadvantages of internal finance?

Answer 5

-Often significant opportunity costs
-Internal finance may not be sufficient enough to meet the needs of the business
-Rarely-tax efficient

Question 6

What is external finance?

Answer 6

Finance sourced from outside of the business

Question 7

What are two advantages of bank loans?

Answer 7

-Offers both short term and long term finance
-A way to generate large sums of finance

Question 8

What are two disadvantages of bank loans?

Answer 8

-Business plan is usually required
-Interest and arrangement fee need to be payed

Question 9

What is crowd funding?

Answer 9

Finance provided by a large amount of small investors on online platforms such as kickstarter

Question 10

What is a disadvantage of crowd funding?

Answer 10

Business need to provide a persuasive business plan and may offer incentives such as samples or early access

Question 11

What is venture capital?

Answer 11

Funds provided by specialist investors in small to medium sized businesses that have potential for growth

Question 12

What is a disadvantage of using venture capital?

Answer 12

Venture capitalists usually require a stake in the business in return for finance and control

Question 13

What are two advantages of using venture capital?

Answer 13

-Businesses that have been refused finance from other methods may seek venture capitalists
-They offer advice and are experts

Question 14

What are overdrafts?

Answer 14

An arrangement for business current account holders to spend more money that it has in its account

Question 15

What is an advantage of using overdraft?

Answer 15

-Offers flexibility to businesses who require short term finance

Question 16

What is a disadvantage of using overdraft?

Answer 16

Interest rates tend to be very high

Question 17

What is leasing?

Answer 17

An asset is used by a business in return for regular payments

Question 18

What is a disadvantage of using leasing?

Answer 18

-More expensive in the long run than buying the asset

Question 19

What is an advantage of using leasing?

Answer 19

The business does not own the asset so does not have to pay for maintenance or repair costs

Question 20

What is trade credit?

Answer 20

AN agreement is made with suppliers to buy raw materials which are paid for at a later date

Question 21

What is an advantage of using trade credit?

Answer 21

Trade credit is usually interest free

Question 22

What are grants?

Answer 22

Governments trusts may offer sums of finance to businesses that meet specific criteria

Question 23

What is an advantage of grants?

Answer 23

They don’t need to be repaid

Question 24

What is share capital?

Answer 24

Finance raised from the sales of shares in a limited company

Question 25

What is a disadvantage of share capital?

Answer 25

The business needs to pay shareholders dividends (part of the company’s profit)

Question 26

What are mortgages?

Answer 26

Long-term secured loans, typically used for the purchase of buildings

Question 27

What are two disadvantages of mortgages?

Answer 27

-Assests are at risk if businesses does not make repayments as planned
-Repayments may increase depending on the interest rate

Question 28

What is unlimited liability?

Answer 28

Owners are fully responsible for all debts owed by the business

Question 29

What methods of finance are suitable for limited liability businesses?

Answer 29

-Venture capitalists
-Business angels
-Retained profit
-Share capital

Question 30

What are the methods of finance suitable for

Answer 30

-Grants
-Crowd funding
-Trade credit
-Overdraft
-Retained profits

Question 31

Why may an unlimited liability business find it hard to source invested finance?

Answer 31

-Investors prefer to invest in limited companies as they are often able to obtain a share of the business

Question 32

Why may a bank be hesitant to loan money to a business with limited liability?

Answer 32

Businesses with limited liability are able to not pay back the debts of the business as they aren’t responsible for the businesses debts

Question 33

What is the main aim of using a business plan?

Answer 33

To reduce the risk associated with starting a business
Forces the owner to think about every aspect before they start

Question 34

What is an advantage of having a business plan?

Answer 34

-The business will be well-informed about potential problems and can select the most appropriate method of finance

Question 35

What is a cash flow forecast?

Answer 35

A prediction of the anticipated cash inflows and outflows over a period

Question 36

What are two uses of cash flow forecasting?

Answer 36

-Support an application for a loan as they are part of the business loan
-Can identify potential problems of cash shortfall and help manage these problems

Question 37

What are two limitations of cash flow forecasting?

Answer 37

-They are based on estimates and in reality cash outflows and inflows may differ
-They require appropriate skills and research to prepare