Sources of Finance

Question 1

What is finance

Answer 1

Finance is the money available to spend on business needs.

Question 2

REASONS WHY A BUSINESS NEEDS FINANCE

Answer 2

To start a new business
To expand the business
To pay workers
To buy new equipment – Tills
To buy premises
To buy stock – clothes, coat hangers etc
To pay bills – Electricity, Insurance
To promote the business
To cover a fall in demand

Question 3

what are the two main sources of finance

Answer 3

Internal sources - finance from within the business

External sources- finance from outside the business

Question 4

some examples of INTERNAL SOURCES are

Answer 4

1. Retained profits are profits that owners have decided to put back into the business after costs. Used for running costs & expansion
2. Owners capital money put in by owners. E.g. owners savings, inheritance, Used for start up costs, buying equipment and expansion
3. Sale of assets a one off way to raise money. Generally used when a business is struggling. E.g. selling machinery it no longer uses. Used for buying equipment and emergency running costs

Question 5

some examples of EXTERNAL SOURCES are

Answer 5

1 Short-term finance: money used for day to day expenses, usually paid back in less than a year. e.g. overdraft, friends and family

2 Medium-term finance: usually for between 1-5 years.
e.g. bank loan, hire purchase, trade credit, leasing, debt factoring

3 Long-term finance: usually for 5 years or more and can be used to pay for major expenditures, for example buying new premises. e.g. selling shares, debentures, mortgages, venture capital and government grants