sources and methods of finance-miss duddigan

Question 1

what is internal finance

Answer 1

finance comes from within the business

Question 2

what is external finance

Answer 2

finance comes from outside the business

Question 3

what are methods of internal finance

Answer 3

owners capital
retained profit
sale of assets

Question 4

what is owners capital
what is the advantage and disadvantage

Answer 4

when the owner invests into a business often personal savings
-likely used for sole traders or partnerships when starting up
adv-doesn’t need paying back
dis-amount is limited depends on wealth of individual

Question 5

what is sale of assets and adv and dis

Answer 5

selling unneeded assets to generate capital
such as old machinery etc
-newer or efficient businesses less likely to use as they use all there assets already
adv- don’t need to pay interest meaning cheap source of finance
dis-business no longer owns asset
can take long time to sell and get cash

Question 6

what is retained profit

Answer 6

where profit is retained built up and used for later investment
-newer businesses cant use as dont yet have enough profit
-adv-no interest to pay on it!
dis-isn’t used on its own to fund expansion most of the time

Question 7

what are methods of external finance

Answer 7

friends and family
banks
peer to peer lending
business angels
crowd funding
other businesses

Question 8

adv and dis of using friends and family

Answer 8

adv-normally as a gift and normally willing to pay little or no interest
dis-may be little amount and could cause strain on relationship of not given back in right time

Question 9

adv and dis of using banks

Answer 9

banks offer overdrafts, mortgages and loans
adv-banks can often give extra advice
dis-strict lending criteria

Question 10

adv and dis of using peer to peer lending

Answer 10

operated online
allow individuals to lend money to other individuals or businesses
adv-good option if bank loan has refused

Question 11

adv and dis of business angels

Answer 11

wealthy individuals investing in business as see it could be successful
adv-may have a lot of business knowledge and useful contacts
dis-may interfere with business decisions/they now have some control into the business

Question 12

adv and dis of crowd funding

Answer 12

raising money on the internet
each person contributes to small amount but all together can be a lot
common for start up businesses
bsuiness puts details of new idea on website and then people fund
rewards often fiven to those who donate such as discounted price

Question 13

what methods of finance most likely to be used for short term

Answer 13

overdrafts
leasing
grants
trade credit

Question 14

overdrafts adv and dis

Answer 14

bank lets a business have negative amount of money in bank account
adv- easy to arrange and flexible-can borrow as little or as much as they need to up to overdraft limit
dis-may be fixed charge for using them so not good for long term

Question 15

leasing adv and dis

Answer 15

business doesn’t have enough money for new assets can lease instead
paying monthly sums of money each money to get the use of an asset
adv-business dont have to pay large up front sum for asset at start
dis-can be more costly on long run then just buying an asset

Question 16

grants adv and dis

Answer 16

fixed sum of money often given by government
adv-doesn’t have to be paid back
dis- application process can be long and time consuming

Question 17

trade credit adv and dis

Answer 17

when business buys a good or service and doesn’t have to pay straight away
has agreed time limit
dis-missing out on discounts for paying up front
failure to pay back in time could result in problems, will need to pay back and may get a fee

Question 18

what are the long term methods of finance

Answer 18

loans
share capital
venture capital

Question 19

loans adv and dis

Answer 19

fixed amount of money borrowed to be lender back over a fixed period of time
can be from families friends peer to peer lenders etc
adv- only have to pay back loan and interest
loan provider wont own any of the business
dis-difficult to arrange, loan provider only going to loan if they think there going to get that money back

Question 20

share capital adv and dis

Answer 20

money raised by selling shares in the business
adv-doesn’t have to be repaid
dis-original owner no longer owns all of the business
shareholders now expect shares of the profits as dividends
costly and time consuming
shareholders may want a say on how business is being operated

Question 21

venture capital adv and dis

Answer 21

money that can be used as a method of finance for business in high risk but high potential to be successful
can be provided by business angels(potential)
provide much more money then business angels
most likely want well established business other then start up business
adv-doesn’t have to be repaid
dis- investors may want big say into the business.