Short Questions And Answers Flashcards
3 situations a business might want/ need to raise finance
Start up a business
Run a business day to day
Develop and grow a business
What is meant by source of finance?
Places where a business may gain finance from within the business
Using examples, distinguish between internal/external sources of finance
Internal: retained profit, owners capital
External: family/friends, banks, crowdfunding
When is owners capital most likely to be used as a source of finance?
Source of start up finance
What two forms can owners capital take?
Share capital or lent to a business as a loan
What is meant by owners capital
Owners savings that can be used for the business
What is meant by retained profit?
Once all costs have been covered and dividends paid to shareholders, any profit left is retained and can be used as a source of finance
Advantage/ disadvantage of retained profit for re investment
A: no interest, safe way to get finance
D: less dividends to shareholders
What is meant by an asset?
Something you owe
Advantage/ disadvantage of sale of assets
A: no interest
D: can’t use assets again, may not sell for a lot
How might family/ friends provide finance?
Loans
Equity (shareholding)
Purpose of collateral when taking a bank loan
Collateral is property or assets that a borrower offers a lender to secure a loan
What is meant by peer to peer lending and why use it?
Peer to peer lending relies on websites that can match investors willing to lend to business start ups with startups needing finance.
Provides an option where banks are unwilling to lend
What is meant by a business angel?
Individuals who provide capital to high risk, small business ventures or start ups. Willing to invest in risky business start ups and become involved in strategic management in hope of high returns
Distinguish between peer to peer lending and a business angel
Peer to peer lending is on business whereas business angels isn’t
What is meant by crowdfunding?
Allows small investors to find business start ups in which they are willing to invest through crowdfunding websites
Advantage/ disadvantage of crowdfunding
A: many small investors can be gathered in order to provide all the finance necessary
D: may not raise as much as you need
What is a loan?
Providing a lump sum of cash, which will be repaid over an agreed period of time.
Interest payments will also be made over the course of the loan
Distinguish between fixed and variable interest rates
Variable- a loan in which the interest rate charged on the outstanding balance varies as market interest rates change
Fixed- interest rate charged on the loan will remain fixed for that loans entire term
Advantage/ disadvantage of a loan
A: large amounts can be borrowed, repayments are predictable
D: interest must be paid whether the business is profitable or not
What is meant by share capital?
When a private company is formed, the ownership of the business is split into shares. These shares can be sold to investors who become shareholders. When the first share is sold, capital enters the business.
What is meant by venture capital?
A method of providing finance in higher risk investments generally through a combination of loans and shares
When might a business use venture capital?
Generally used to fund a significant period of growth for an established small business
What is meant by overdraft?
Facility offered by bank to allow a customer to continue spending money even when their account becomes negative
When would it be appropriate to use an overdraft?
Takes place when a business makes payments out of its current account and exceeds its available balance
Advantage/ disadvantage of overdraft
A: flexible, only used when needed
D: interest rates are high, expensive
What is meant by leasing?
When an asset us rented rather than purchased
Advantage/ disadvantage of leasing
When an asset is rented rather than purchased
Advantage/ disadvantage of leasing
A: sensible method of avoiding large chunks of outflow each time a major new asset is purchased
D: long term leasing is expensive
What is meant by trade credit?
When a business is able to buy now and pay later for its supplies
When might a business use trade credit?
Helpful tool for growing businesses. Puts less pressure on cash flow that immediate payment would make
Advantage/ disadvantage of trade credit
A: increased sales, customer loyalty
D: higher prices of raw materials, expensive, only available to those companies that have a good track record
What is meant by a grant
Money given by the government or local council to businesses who are making a positive difference in the community
When might a business use grants?
Usually small businesses. The only start ups that mat receive a grant are those likely to create jobs in areas of economic deprivation
Advantage/ disadvantage of grants
A: you can receive generous amounts of money, good way to build your organisations visibility and credibility
D: time consuming research, competition is fierce, short term
Two methods of finance on which interest must be paid
Venture capital
Loans
Which method is not available to sole traders or partnership?
Share capital
What is meant by limited liability
The legal duty to pay debts run up by a business stays with the business itself, not its owner/ shareholders
What is the name given to owners of a limited company
Public limited company
Private limited company
What is meant by unlimited liability?
Responsible for paying all of the debts personally if the company can’t make its payments
Which type of business ownership has unlimited liability?
Sole trader and partnerships
Which sources of finance are available to sole traders and partnerships?
Bank loans, owners capital, retained profit, working capital, sale of assets
Which additional sources of finance are available for Ltd and Plcs
Venture capital, grants, business angels
