Short Questions And Answers

Question 1

3 situations a business might want/ need to raise finance

Answer 1

Start up a business
Run a business day to day
Develop and grow a business

Question 2

What is meant by source of finance?

Answer 2

Places where a business may gain finance from within the business

Question 3

Using examples, distinguish between internal/external sources of finance

Answer 3

Internal: retained profit, owners capital
External: family/friends, banks, crowdfunding

Question 4

When is owners capital most likely to be used as a source of finance?

Answer 4

Source of start up finance

Question 5

What two forms can owners capital take?

Answer 5

Share capital or lent to a business as a loan

Question 6

What is meant by owners capital

Answer 6

Owners savings that can be used for the business

Question 7

What is meant by retained profit?

Answer 7

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

Question 8

Advantage/ disadvantage of retained profit for re investment

Answer 8

A: no interest, safe way to get finance
D: less dividends to shareholders

Question 9

What is meant by an asset?

Answer 9

Something you owe

Question 10

Advantage/ disadvantage of sale of assets

Answer 10

A: no interest
D: can’t use assets again, may not sell for a lot

Question 11

How might family/ friends provide finance?

Answer 11

Loans

Equity (shareholding)

Question 12

Purpose of collateral when taking a bank loan

Answer 12

Collateral is property or assets that a borrower offers a lender to secure a loan

Question 13

What is meant by peer to peer lending and why use it?

Answer 13

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

Question 14

What is meant by a business angel?

Answer 14

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

Question 15

Distinguish between peer to peer lending and a business angel

Answer 15

Peer to peer lending is on business whereas business angels isn’t

Question 16

What is meant by crowdfunding?

Answer 16

Allows small investors to find business start ups in which they are willing to invest through crowdfunding websites

Question 17

Advantage/ disadvantage of crowdfunding

Answer 17

A: many small investors can be gathered in order to provide all the finance necessary
D: may not raise as much as you need

Question 18

What is a loan?

Answer 18

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

Question 19

Distinguish between fixed and variable interest rates

Answer 19

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

Question 20

Advantage/ disadvantage of a loan

Answer 20

A: large amounts can be borrowed, repayments are predictable
D: interest must be paid whether the business is profitable or not

Question 21

What is meant by share capital?

Answer 21

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.

Question 22

What is meant by venture capital?

Answer 22

A method of providing finance in higher risk investments generally through a combination of loans and shares

Question 23

When might a business use venture capital?

Answer 23

Generally used to fund a significant period of growth for an established small business

Question 24

What is meant by overdraft?

Answer 24

Facility offered by bank to allow a customer to continue spending money even when their account becomes negative

Question 25

When would it be appropriate to use an overdraft?

Answer 25

Takes place when a business makes payments out of its current account and exceeds its available balance

Question 26

Advantage/ disadvantage of overdraft

Answer 26

A: flexible, only used when needed D: interest rates are high, expensive

Question 27

What is meant by leasing?

Answer 27

When an asset us rented rather than purchased

Question 28

Advantage/ disadvantage of leasing

Answer 28

When an asset is rented rather than purchased

Question 29

Advantage/ disadvantage of leasing

Answer 29

A: sensible method of avoiding large chunks of outflow each time a major new asset is purchased D: long term leasing is expensive

Question 30

What is meant by trade credit?

Answer 30

When a business is able to buy now and pay later for its supplies

Question 31

When might a business use trade credit?

Answer 31

Helpful tool for growing businesses. Puts less pressure on cash flow that immediate payment would make

Question 32

Advantage/ disadvantage of trade credit

Answer 32

A: increased sales, customer loyalty D: higher prices of raw materials, expensive, only available to those companies that have a good track record

Question 33

What is meant by a grant

Answer 33

Money given by the government or local council to businesses who are making a positive difference in the community

Question 34

When might a business use grants?

Answer 34

Usually small businesses. The only start ups that mat receive a grant are those likely to create jobs in areas of economic deprivation

Question 35

Advantage/ disadvantage of grants

Answer 35

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

Question 36

Two methods of finance on which interest must be paid

Answer 36

Venture capital | Loans

Question 37

Which method is not available to sole traders or partnership?

Answer 37

Share capital

Question 38

What is meant by limited liability

Answer 38

The legal duty to pay debts run up by a business stays with the business itself, not its owner/ shareholders

Question 39

What is the name given to owners of a limited company

Answer 39

Public limited company | Private limited company

Question 40

What is meant by unlimited liability?

Answer 40

Responsible for paying all of the debts personally if the company can’t make its payments

Question 41

Which type of business ownership has unlimited liability?

Answer 41

Sole trader and partnerships

Question 42

Which sources of finance are available to sole traders and partnerships?

Answer 42

Bank loans, owners capital, retained profit, working capital, sale of assets

Question 43

Which additional sources of finance are available for Ltd and Plcs

Answer 43

Venture capital, grants, business angels