Section D Select And Evaluate Different Sources Of Business Finance

Question 1

What is an internal source of finance -name 3 sources.

Answer 1

Internal is those available from within a business
3 types:
Retained profit
Net current assets
Sale of assets

Question 2

Retained profit is an internal source of finance. Define it and give pros and cons

Answer 2

RETAINED PROFIT
profit kept in the business to fund future expenditure

pros
- No interest
- Less risky
cons
- May ask for dividends (proportion of profit)
- Taking money from company savings

Question 3

Net current assets are a internal source of finance. Define it and give pros and cons

Answer 3

NET CURRENT ASSETS
shows the money available in the business to fund day to day expenditure

pros
- don’t need an external source of finance
- less risky
cons
- losing assets
- generates interest over short time

Question 4

Sale of assets is an internal source of finance. Define it and give pros and cons

Answer 4

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

pros
- less risky
- don’t need an external source of finance
cons
- loss of assets

Question 5

Owners capital is an EXTERNAL source of finance. Define it and give pros and cons

Answer 5

OWNERS CAPITAL
Money invested in the business from an owners personal savings

pros
- quick and convenient
- doesn’t require borrowing money
- no interest payments

cons
- owner may not have enough savings
- one the money is gone, it’s gone

Question 6

Loans are an EXTERNAL source of finance. Define it and give pros and cons

Answer 6

LOANS
Money borrowed from a financial institution for a set period of time and for a specific purpose

pros
- easy and quick access
- can get a significant amount of money at one time

cons
- have to pay interest
- difficult for a new business to access

Question 7

Crowd-funding is an EXTERNAL source of finance. Define it and give pros and cons

Answer 7

CROWD FUNDING
Attracting investment from a large number of investors.

pros
- fast way to raise finance with no upfront fees
- good way to test public reaction to your idea
- investors can track your progress
- helps promote your brand

cons
- need a patent
- failed projects can ruins your brands reputation

Question 8

Venture Capital is an EXTERNAL source of finance. Define it and give pros and cons

Answer 8

VENTURE CAPITAL
Investment from an experienced entrepreneur in return for stake in the business

pros
- gain money quickly
- potential to raise a lot of money
- may offer advice and help

cons
- owner must give away a part of their business
- may have a different vision from one another

Question 9

Hire purchase is an EXTERNAL source of finance. Define it and give pros and cons

Answer 9

HIRE PURCHASE
Paying to use an asset in instalments to spread the cost over its useful life

pros
- saves money for a business as payments are spread over use
cons
- interest is charged
- equipment is not owned until the final payment is made

Question 10

Leasing is an EXTERNAL source of finance. Define it and give pros and cons

Answer 10

LEASING
involves paying to use an asset in instalments eg. renting a photocopier. Ownership of the asset stays with the supplier throughout the length of the lease agreement

pros
- no large upfront payments
- leasing company may be responsible for repairs and maintenance

cons
- over time it can be a more expensive way to obtain assets
- assets are not owned by the business

Question 11

trade credit is an EXTERNAL source of finance. Define it and give pros and cons

Answer 11

TRADE CREDIT
this is the period of time offered by suppliers to allow the customer to purchase a good or service now and pay at a later date, eg. 30 days after purchase eg. ordering stock

pros
- access to supplies without immediate payment
- no interest

cons
- short term, must be paid off quickly
- usually small amounts

Question 12

grants are an EXTERNAL source of finance. Define it and give pros and cons

Answer 12

GRANTS
this is a lump sum provided to a business by the government or another organisation to be used for a specific purpose. eg. it could be used to provide employment in a deprived area or invest in a research project

pros
- does not need to be paid back
- available to small businesses

cons
- business needs to meet a certain criteria
- it is time consuming to apply for grants and complete the paperwork

Question 13

donations are an EXTERNAL source of finance. Define it and give pros and cons

Answer 13

DONATIONS
these are sums of money given voluntarily to a charity or social enterprise

pros
- they may lend funds interest free or at a low rate
- they may agree to a longer repayment period
- they may help you raise large amounts of money
- they may make it easier to receive other grants

cons
- donations require a regular time commitment by all involved
- all grants need to be properly documented and meeting minutes need to be kept

Question 14

peer to peer lending is an EXTERNAL source of finance. Define it and give pros and cons

Answer 14

PEER TO PEER LENDING
this involves one business person lending money to another business person in return for interest payments

pros
- tends to be relatively quick and convenient
- you may be able to borrow a smaller amount than some other lenders
- you can borrow money for a wide variety of purchases. platforms will set their own criteria of what a loan can be used for

cons
- may be a higher interest rates than others
- if you run into difficulties repaying the loan, you may not receive the same protection as you would when borrowing through a traditional lender.

Question 15

What is debt factoring

Answer 15

Selling your business debts to a 3rd party company who will chase up your debts in order to receive cash quickly.

Question 16

What is a amortisation

Answer 16

Amortisation is when the value of an intangible asset changes over time so a one off change will be made to the value.