SOF

Question 1

Why do businesses need finance?

Answer 1

• to buy fixed assets like factories, offices and machinery
  -to pay a day to day costs like wages and bills so the business can survive

Question 2

What type of sources of finance are there?

Answer 2

Internal and External

Question 3

What is internal finance?

Answer 3

Money from within the business such as profit

Question 4

What is external finance?

Answer 4

Comes from sources outside the business like bank loans or shareholder investments

Question 5

Why may a business requires short-term finance

Answer 5

To pay its suppliers or to cover the temporary shortage of cash

Question 6

What is the time frame for Short term finance?

Answer 6

paid back within a year

Question 7

What is the time frame on Long term finance?

Answer 7

Usually due over a longer period like 3 years or more

Question 8

When choosing a source of finance, what 4 things should you consider?

Answer 8

• legal structure of the business
• amount of finance required
• level of risk involved
• if short term or long term finance is needed

Question 9

How can internal finance be raised?

Answer 9

• putting profits back into business
• selling assests

Question 10

What are retained profits?

Answer 10

Profit that is retained and built up over the years for later investment - can work in short and long term.

Question 11

What is the main benefit of using profit for investment?

Answer 11

the business doesn’t have to pay interest on the money

Question 12

What is the disadvantage of using retained profits?

Answer 12

Not all businesses can use this method as they might not be making enough profit

Question 13

Why may shareholders be against retained profits?

Answer 13

they may wish to receive the profits as dividends, and by retaining the profits this may cause the business to miss out on investment opportunities

Question 14

What is an overdraft?

Answer 14

where a bank lets a business have a negative amount of money in its bank account

Question 15

What are benefits for an overdraft?

Answer 15

-easy to arrange
-flexible: businesses can borrow as little or as much as they need (up to overdraft limit)
-only pay interest on the amount of overdraft that they use

Question 16

What are the disadvantages of an overdraft?

Answer 16

-high rates of interest
-may also be a fixed charge for using an overdraft
-unsuitable for use in the long term

Question 17

What is debt factoring?

Answer 17

When banks and other financial institutions take unpaid invoices off the hands of the business and give them and instant cash payment

Question 18

What is an advantage of debt factoring?

Answer 18

they can instantly get money that they are owed

Question 19

What is a disadvantage of debt factoring?

Answer 19

debt factoring companies keep some of the money that owed as a fee.

Question 20

What type of source of finance are bank loans?

Answer 20

Bank loans are an external source of finances

Question 21

What is a bank loan?

Answer 21

Businesses are able to borrow a fixed amount of money and pay it back over a fixed period of time with interest

Question 22

What do banks need from a business to get a loan?

Answer 22

some sort of security usually in the form of property

Question 23

What are loans a useful source of finance for?

Answer 23

Loans are a good long term source of finance for a start-up business and for paying assets back like machinery and computers

Question 24

What are loans not good for?

Answer 24

They are not a good way to cover the day to day running cost of the business

Question 25

What are the advantages of bank loans?

Answer 25

-guaranteed the money for the duration of the loan
-only have to pay back the loan and interest
-interest charges are usually lower than for an overdraft

Question 26

What are disadvantages of bank loans?

Answer 26

-difficult to arrange because a bank will only lend to a business if they think they are going to get it back
-keeping up with repayments can be difficult with bad cash flow in the business
-may have to pay a charge if they pay it back early

Question 27

What is share capital and what type of source of finance is it?

Answer 27

Money that is raised by selling shares in a business, it is an external source of finance

Question 28

What is an advantage of share capital?

Answer 28

-money doesn’t need to be repaid
-new shareholders can bring additional expertise

Question 29

What are drawbacks of share capital?

Answer 29

-original owner no longer own the whole business, may have to pay shareholders a dividend and also give them a say in how the business is run.

Question 30

What is venture capital and what souce of finance it it?

Answer 30

Venture capital is funding in the form of share or loan capital that is invested in a business that is thought to be high-risk.

Question 31

What are venture capitalists?

Answer 31

professional investors who invest in businesses they think have the potential to be successful. They provide business advice but applying for funding is a long process

Question 32

What is crowdfunding?

Answer 32

A method of financing a business or project using contributions made by a large number of people, usually done via the internet through organisations such as Kickstarter.

Question 33

What is gross profit?

Answer 33

the amount left over when the cost of sales is subtracted from sales revenue. Cost of sales includes the costs directly related to making the product.