Sources of business finance

Question 1

internal sources

Answer 1

money from within the business, from the owner or from previous business income

Question 2

external sources

Answer 2

money from outside the business, from other people putting money into the business

Question 3

Internal source: Owners Funds

Answer 3

money put into the businesses from the private savings of its owners.Many businesses are started from the owners savings.

Question 4

Owners Funds-advantages

Answer 4

1) there is no need to pay interest or finance

2) retention of ownership by the individual

Question 5

Owners Funds-Disadvantages

Answer 5

1) may be limited funds available

2) puts stress on the day to day finance of the individual

Question 6

Internal source: Retained profits

Answer 6

when businesses make profits the owners can decide to spend these on themselves or to use some or all of the profits to expand and improve the business

Question 7

Retained profits-advantages

Answer 7

1) internal so there is no need to repay
2) instantly avaliable
3) does not incur additional costs such as intrest
4) control is not lost

Question 8

Retained profits-disadvantages

Answer 8

1) may be limited funding avaliable
2) shareholders may prefer to see short term returns on investment
3) not an option for start up business

Question 9

Internal source:Sale of an asset

Answer 9

some businesses will have possessions that they no longer need.These can be sold off to make money needed for other investments e.g machinery, land, part of business

Question 10

External source: Bank Loan

Answer 10

where the businesses will borrow a lump sum of money that must be repaid over time with interest

Question 11

Bank Loan- advantages

Answer 11

1) repayments in installments
2) makes cash flow easier
3) don’t have to issues shares

Question 12

Bank Loan- disadvantages

Answer 12

1) have to back up loan with security e.g assets

2) pay back interest

Question 13

External Sources:Overdraft

Answer 13

a pre-arranged amount of money the business is allowed to use and pay back when it likes

Question 14

Overdraft-advantages

Answer 14

1) enable short term funding
2) flexibility to review the funding
3) covers day to day expenses

Question 15

Overdraft- disadvantages

Answer 15

1)interest charged if overdrawn, can be ended by bank at any time

Question 16

External Sources:Grants

Answer 16

an amount of money that is given by either European, national or local government , to aid creation of a business

Question 17

Grants-advantages

Answer 17

1) doesn’t have to be paid back
2) helps start up new business
3) creates jobs

Question 18

Grants-disadvantages

Answer 18

1) based on application

2) not available for all businesses

Question 19

External sources:Venture Capital

Answer 19

sometimes called an investor it is a business person who invests in a start- up busniess for a %share of the profits

Question 20

Venture Capital-advantages

Answer 20

1) potential for large sums of money for investment
2) expertise to help the businesses
3) easier to attract other sources of finance

Question 21

Venture Capital-disadvantages

Answer 21

1) loose percentage of business
2) a long and complex process
3) expert financial projections are likely to be required
4) risk of conflict or percived interference

Question 22

External Sources:Hire purchase

Answer 22

it is when you will buy an asset and pay for it monthly.You do not own the asset until you make the last payment.Leasing is similar to hire purchase but you rent the asset and never own it.

Question 23

Hire Purchase-advantages

Answer 23

1) cheaper than buying outright
2) helps to manage cash flow
3) equipment regularly updated

Question 24

Hire Purchase-disadvantages

Answer 24

more expensive in long run due to fees

Question 25

External Sources-trade credit

Answer 25

not immediatley paying suppliers for stock.You are given a certain amount of days to pay

Question 26

Trade Credit-advantages

Answer 26

no intrest to be paid, helps cash flow

Question 27

Trade Credit-disadvantages

Answer 27

suppliers might not be willing to provide the credit

Question 28

External Sources:Share Capital

Answer 28

money paid by shareholders to become owners of a limited company

Question 29

External Sources:Crowdfunding

Answer 29

small amounts of capital from a large number of individuals to finance a new business venture.You will give rewards of returns for the investment

Question 30

Crown Funding-advantages

Answer 30

1) can be a fast way to raise finance with no upfront fees
2) good way to test publics reaction to your product
3) alternative finance option if you struggle to get a bank loan or other funding

Question 31

Crowdfunding-disadvantages

Answer 31

1) takes a lot of work to build up intrest
2) if you don’t meet your funding target the money is returned to the investors
3) getting rewards or returns wrong can mean giving away too much of the business to investors