Sources Of Finance

Question 1

What are sources of finance

Answer 1

The options available to a business when seeking to raise funds to support future business actions

Question 2

What is an internal source of finance and give an example

Answer 2

What is an internal source of finance and give an example

Question 3

what is an external source of finance and give an example

Answer 3

money that comes from outside of the business e.g. bank loan, government grant and debt factoring

Question 4

Advantages of retained profit

Answer 4

No interest charges
Available immediately
Only available up to the amount already accumulated by the business and therefore avoids debt
No loss of ownership (control)

Question 5

Disadvantages of retained profit

Answer 5

• 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 6

Advantages of selling assets

Answer 6

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

Question 7

Disadvantages of selling assets

Answer 7

• You lose valuable stock

- You wouldve received less than you paid for the asset due to deprication

Question 8

Advantages of owners capital

Answer 8

No interest payments or need to repay

High Level of commitment from the owner

Question 9

Disadvantages of owners capital

Answer 9

Amount available is likely to be limited

If there is more than one owner this could cause friction if everyone is not able to contribute the same amount

Question 10

Advantages of a bank loan

Answer 10

• 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 11

disadvantages of a bank loan

Answer 11

reluctance from bank if they have doubts

repaying can be difficult

may ask for loan back early

Question 12

advantages of a government grant

Answer 12

• They are non repayable
• Widely avaliable
• Boost credibility

Question 13

disadvantages of a government grant

Answer 13

• they can be complicated to apply for and can require the business to meet the certain requirements
• grants are usually one-off payments that are not repeated

Question 13

disadvantages of a government grant

Answer 13

• they can be complicated to apply for and can require the business to meet the certain requirements
• grants are usually one-off payments that are not repeated

Question 14

advantages of debt factoring

Answer 14

Speeds up the flow of cash into the business from debts

The factor company takes on the risk of bad debt