Section D - Select and evaluate different sources of business finance

Question 1

What are the types of internal sources of finance?

Answer 1

1) Retained profit
2) Net current assets
3) Sale of assets

Question 2

What is retained profits?

Answer 2

Profits kept in the business to fund future expenditure.

Question 3

What is net current assets?

Answer 3

Current assets minus current liabilities shows the money available in the business to fund day-to-day expenditure.

Question 4

What is sale of assets?

Answer 4

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

Question 5

What are the advantages of retained profit?

Answer 5

No interest charges
Available immediately
Only available up to the amount already accumulated by the business and therefore avoids debt
No loss of ownership (control)

Question 6

What are the disadvantages of retained profit?

Answer 6

Amount available may be limited
Reduces payments to shareholders which may cause dissatisfaction
Once used it is not available for alternative purposes

Question 7

What are the advantages of net current assets?

Answer 7

Encourages the business to manage cash flow effectively

Question 8

What are the disadvantages of net current assets?

Answer 8

Can put pressure on customers as shorter credit terms are offered and this negatively affects relationships with suppliers if longer credit terms are negotiated
Lower stock holdings can affect the firm’s ability to meet customer needs

Question 9

What are the advantages of sale of assets?

Answer 9

No interest charges
Reduces capital tied up in assets, releasing it for other purposes.
Can mean disposing on an asset no longer of use to the business.

Question 10

What are the disadvantages of sale of assets?

Answer 10

It is likely that the amount received is not a true reflection of the value of the asset.
Can increase costs in the longer run if an asset needs to be leased back.

Question 11

What is external sources of finance?

Answer 11

Finance made available from outside the business.

Question 12

Give some examples of external sources of finance?

Answer 12

1) Owner’s capital
2) Loans
3) Crows-funding
4) Mortgages
5) Venture capital
6) Debt factoring
7) Hire purchase
8) Leasing
9) Trade credit
10) Grants
11) Donations
12) Peer-to-peer lending
13) Invoice discounting.

Question 13

What is crowd-funding?

Answer 13

Involves attracting investment from a large number of speculative investors many of whom may invest relatively small amounts. If cumulatively this matches the required amount then the investments are collected together.

Question 14

What is debt factoring?

Answer 14

This involves the selling on of a business’s debts to a third party in order to receive the cash quickly.

Question 15

What are the advantages of owners capital?

Answer 15

No interest payments or need to repay

High level of commitment from the owner

Question 16

What are the disadvantages of owners capital?

Answer 16

Amount available is likely to be limited
If there is more than one owner this could cause
friction if everyone is not able to contribute the same amount

Question 17

What are the advantages of loans?

Answer 17

Regular pre-agreed repayments make planning and budgeting relatively easy
Ownership or control is not lost

Question 18

What are the disadvantages of loans?

Answer 18

Interest is charged on the amount borrowed Interest rates can fluctuate
Often secured against an asset which can be seized if repayments are missed
Interest has to be paid regardless of whether a profit is being made

Question 19

What are the advantages of crowd-funding?

Answer 19

Offers the ability to raise finance from a large number of investors
No interest is paid as investors will only be rewarded if the business is successfully sold on at a later date

Question 20

What are the disadvantages of crowd-funding?

Answer 20

Partial loss of ownership

No guarantee that the crowd fund will attract sufficient investment to meet the proposal

Question 21

What are the advantages of mortgages?

Answer 21

Large amounts of nance can be raised and repaid over a prolonged period of time
Ownership or control is not lost

Question 22

What are the disadvantages of mortgages?

Answer 22

Interest is charged on the amount borrowed Interest rates can uctuate
Often secured against an asset which can be seized if repayments are missed
Interest has to be paid regardless of whether a pro t is being made
Not suitable for small amounts or as a short-term source of nance

Question 23

What are the advantages of Venture capital?

Answer 23

Finance is provided by a business professional who will often offer advice and mentoring alongside the investment
Venture capitalists are often risk takers and may see the potential in a high risk investment that other investors including banks may not be willing to invest in

Question 24

What are the disadvantages of Venture capital?

Answer 24

Partial loss of ownership and control
Conflict can arise between the entrepreneur and
venture capitalist regarding the direction and day-to-day running of the business

Question 25

What are the advantages of debt factoring?

Answer 25

Speeds up the ow of cash into the business from debts

The factor company takes on the risk of bad debt

Question 26

What are the disadvantages of debt factoring?

Answer 26

Only receive a percentage of the amount owed, therefore reducing pro ts
Can give the wrong impression or alienate customers

Question 27

What are the advantages of hire purchase?

Answer 27

Avoids the need to pay a lump sum for the use of an asset
Regular instalments make planning and budgeting easier
Spreads the cost of an asset over its useful life

Question 28

What are the disadvantages of hire purchase?

Answer 28

Overall amount paid for the use of an asset is likely to be higher than if purchased outright
Only really suitable for relatively low cost assets, e.g. vehicles and not premises

Question 29

What are the advantages of leasing?

Answer 29

Responsibility for maintaining and repairing the asset stays with the supplier
Spreads the cost of an asset over its life to avoid paying a lump sum up front

Question 30

What are the disadvantages of leasing?

Answer 30

Overall amount paid for the use of an asset is likely to be higher than if purchased outright
Never actually own the asset and therefore payments are ongoing

Question 31

What are the advantages of trade credit?

Answer 31

Delays the need to pay for goods and services purchased, therefore aiding cash flow
No loss of ownership or control

Question 32

What are the disadvantages of trade credit?

Answer 32

Potential loss of discounts offered for cash payments Only suitable as a short-term source of finance

Question 33

What are the advantages of grants?

Answer 33

No need to repay and no interest charges

No loss of ownership or control

Question 34

What are the disadvantages of grants?

Answer 34

Often require a lengthy application process

Might only be awarded if certain conditions are met affecting the way the business operates on a day-to-day basis

Question 35

What are the advantages of donations?

Answer 35

No need to repay and no interest charges

No loss of ownership or control

Question 36

What are the disadvantages of donations?

Answer 36

Likely to be small amounts only

Unpredictable

Question 37

What are the advantages of peer to peer lending?

Answer 37

Interest rates can be lowered than lending from more traditional financial institutions.
Fixed rate of interest can be agreed making it easier to plan and budget.

Question 38

What are the disadvantages of peer to peer lending?

Answer 38

Amounts available may be limited and provided for a short period of time only

Question 39

What are the advantages of invoice discounting?

Answer 39

No need to repay and no interest charges
No loss of ownership or control
Reduces costs to the business so increases profit

Question 40

What are the disadvantages of invoice discounting?

Answer 40

Often only available if purchases are paid in cash which affects cash flow