Sources of business finance

Question 1

Short term finance OVERDRAFT

Answer 1

you can withdrawl more money than you actually have in an account however interest rates will be charged on the amount overdrawn

Question 2

Short term finance TRADE CREDIT

Answer 2

When a supplier allows you a period of time to pay for goods and services.

Question 3

Advantages of TRADE CREDIT

Answer 3

+builds trust between you and supplier

Question 4

Disadvantages of TRADE CREDIT

Answer 4

• could get more debt

- wont get paid back

Question 5

Advantages of OVERDRAFT

Answer 5

+can spend more
+safety net
+emergency access

Question 6

Long term finance PERSONAL SAVINGS

Answer 6

any money the entrepreneur has saved up, either before starting the business or during the running of the business

Question 7

Long term finances SHARE CAPITAL

Answer 7

finance is raised by issuing shares to other investors, who invest money in start up businesses, in return for a share of ownership of the business

Question 8

Long term finance LOAN

Answer 8

a sum of money borrowed that will be paid back over an agreed period of time

Question 9

Long term finance CROWD FUNDING

Answer 9

ordinary people getting together to raise finance for businesses and projects, these investors take a small stake in a business by contributing towards an online fundraising target

Question 10

Long term finance VENTURE CAPITAL

Answer 10

a specific kind of share investment that is made by funds managed by professional investors. The minimum investment is usually over £1m, so they dont often invest in small start up businesses

Question 11

Long term finances RETAINED PROFITS

Answer 11

this is the cash that is generated by the business, which is kept in the business

Question 12

PERSONAL SAVINGS advantages

Answer 12

+avoids bank charges (interest)
+security
+easily assessable

Question 13

PERSONAL SAVINGS disadvantages

Answer 13

• could earn interest if kept in the bank (weigh up if a loan would be more beneficial for the business)
• limited amount

Question 14

LOANS advantages

Answer 14

+fixed interest rates, therefore the business knows how much they will pay back

Question 15

LOANS disadvantage

Answer 15

• interest rates are high and cost the business

- businesses will be required to sell assets if they are unable to pay back the agreed loan payment

Question 16

VENTURE CAPITAL advantages

Answer 16

+access to investors knowledge, skills, money and contacts

Question 17

VENTURE CAPITAL disadvantage

Answer 17

-start up founders are likely to lose some control over business decision making

Question 18

SHARE CAPITAL advantages

Answer 18

+raise large amounts of finance

+shareholders may not want to be too involved in the day to day running of the business

Question 19

SHARE CAPITAL disadvantage

Answer 19

-tensions can arise with family and friends and other shareholders

Question 20

RETAINED PROFITS advantages

Answer 20

+easy to obtain

+very flexible as management control how they are reinvested (no interest)

Question 21

RETAINED PROFITS disadvantage

Answer 21

• shareholders may prefer dividends (payouts) but no guarantee a business will make profit

Question 22

CROWDFUNDING advantages

Answer 22

+can be fast way to raise finance with no upfront fees

+alternative finance option if a business has struggled to get a bank loan or traditional funding

Question 23

CROWDFUNDING disadvantages

Answer 23

• a lot of work is involved to build up interest in potential investors
• if the funding target is not met, any finance that has been pledged will usually be returned to investors