sources of finance

Question 1

What are the internal sources of finance

Answer 1

Retained profit
Working capital
Sale of assets

Question 2

Advantages of retained profit

Answer 2

• Cheap, no interest
• Doesn’t have to be repaid
• Flexible as business can select how to use
• Owners have control without interference from financial institutions

Question 3

Disadvantages of retained profit

Answer 3

• Often not significant in early years of business
• If low, may not be enough for expansion
• Overuse may leave no buffer for future growth opportunities
• Too high may mean shareholders received very little as dividends

Question 4

Advantages of selling assets

Answer 4

convenient, can create space for more profitable uses, and can be quick

Question 5

Disadvantages of selling assets

Answer 5

• Less to sell

- Lessen the value of the business

Question 6

Examples of external sources of finance

Answer 6

Government grants.
Hire purchase.
Overdraft.
Bank loan.
Venture capitalists.

Question 7

Advantages of trade credit

Answer 7

• Delays the need to pay for goods and services purchased, therefore aiding cash flow
• No loss of ownership or control

Question 8

disadvantages of trade credit

Answer 8

• Potential loss of discounts offered for cash payments

- Only suitable as a short-term source of finance

Question 9

Advantages of leasing

Answer 9

1) 100% financing at fixed rates
2) protection against obsolescence
3) flexibility
4) less costly financing
5) tax advantages
6) off-balance-sheet financing

Question 10

Disadvantages of leasing

Answer 10

• no ownership interest
• must meet requirements
• may have additional costs for extra mileage, turning the car in early, or for certain repairs

Question 11

Advantages of a bank loan

Answer 11

• the business can budget for the repayments
• purchases of essential equipment can be made in
  advance and paid back over a number of years

Question 12

disadvantages of a bank loan

Answer 12

• reluctance from bank if they have doubts
• repaying can be difficult
• may ask for loan back early

Question 13

Advantages of overdraft

Answer 13

+ quick, easy method of borrowing a certain amount of money for a short period of time

Question 14

Disadvantages of overdraft

Answer 14

• possible high interest rates

- bank can withdraw overdraft at any