Sources and Methods of Finance

Question 1

Considerations when choosing an appropriate source of finance?

Answer 1

Amount of money required
Level of risk involved
Cost of the finance

Question 2

Internal Sources of Finance

Answer 2

Owner’s capital
Selling assets
Retained profit

Question 3

External Sources of Finance

Answer 3

Banks
Family and friends 
Crowdfunding 
Business angels 
Peer to peer lending 
Other businesses

Question 4

Owner’s capital +ve’s & -ve’s

Answer 4

(+)Easy access and doesn’t need paying back

-) The amount of finance that can be raised is limited - it depends on the personal wealth of the owner(s

Question 5

Selling assets +ve’s and -ve’s

Answer 5

(+) No interest need to be paid back = cheap source of finance
(-) The business no longer owns the asset.
Can take a long time to sell the asset.

Question 6

Retained profit

Answer 6

(+) Doesn’t need to pay interest on it.
(-) Shareholders may object to using this source of finance as they may wish to receive the profit as dividends.
Retained profit may cause the business to miss out on investment opportunities.

Question 7

Family and friends

Answer 7

(+) flexible repayment, possibility to little to no interest
(-) amount of money available may be small
could place a strain on the relationship

Question 8

Banks

Answer 8

(+) recognised financial institutions
they can advise a business and provide other services, such as completing financial documents.
(-) strict lending criteria can be hard for start-ups or other risky businesses to be approved for finance

Question 9

Crowdfunding

Answer 9

(+) raises awareness - increase sales
(-) details of the business are made public, the business risks having its idea copied by someone else before they’ve got the idea up and running.
If the business idea fails, lots of people may be aware of it, which may negatively affect the reputation of the business.

Question 10

Peer to peer lending

Answer 10

(+) Usually have a lower rate of interest than a bank loan

-

Question 11

Other businesses

Answer 11

(+) may offer better returns if bank interest rates are low
(-) likely to want shares in the other business.&raquo_space; gain some control of the business or have an influence in its decision making

Question 12

Business angels

Answer 12

(+) may have lots of business knowledge&raquo_space; offer advice
may have connections
(-) difficult and time-consuming trying to find a business angel. A share of the business has to be given up&raquo_space; lose some control and decision-making ability