Sources Of Finance

Question 1

Two reasons why a business would venture for the 6 different sources of finance

Answer 1

• help liquidity problems

- raise large sums of money for capital expenditure

Question 2

What is debt factoring

Answer 2

• being owed money but the business is suffering liquidity problems so u need the money NOW to meet financial commitment (paying employees, marketing suppliers)
• selling debt to debt factoring company.
  E.g if ur owed 100,000 they will give u 80,000 then get paid the full 100k later

Question 3

What is the advantage of debt factoring

Answer 3

Allows business to release cash to solve liquidity

Question 4

What is a drawback to debt factoring

Answer 4

Missing out on the full value of the sales the business has made by selling the debt

Question 5

What is an overdraft

Answer 5

Spend when you have run out of money
To an agreed limit
PLC’s = millions (key point)

Question 6

What is an advantage of bank overdraft

Answer 6

Allows a business to continue purchasing assets they need for the organisation even when they have mo cash of their own
- meet financial commitments

Question 7

What is the drawback of having an overdraft

Answer 7

U have to pay it back + interest (which is larger)

- expensive

Question 8

What is retained profit

Answer 8

Keeping a percentage of profits to re invest in company (growth, expansion, development)

Question 9

What is an advantage of retained profit

Answer 9

• internal source of finance = no interest

Question 10

What is the drawback in retained profit

Answer 10

Money is taken away from shareholders = they will feel entitled to the profits = short term shareholders will cut and invest elsewhere
= long term shareholders = will stay cos they see opportunity for business growth = more shmoneyyy

Question 11

What is share capital

Answer 11

Bringing new owners into organisation in return for a share of the businesses ownership

Question 12

What is the advantages of share capital

Answer 12

• brings in large sums of money in return for stake of company
• share holders (in LTDs) bring in some industry knowledge/ contacts = aid the business

Question 13

What is the drawback of share capital

Answer 13

• relinquishing some control of the organisation = to cater for new shareholders needs
• Some shareholders want to direct the organisation

Question 14

What is bank loans

Answer 14

Mortgages (securing factories. Warehouses,office space)

Investing in IT, machinery, vehicles

Question 15

What is an advantage of bank loans

Answer 15

• raise significant sums of money

- formal agreement with organisation with structured repayments that can be planned and included into cash flow forecast

Question 16

What is a limitation of bank loans

Answer 16

• they have to be replayed + interest = expensive

Question 17

What can you contrast bank loans with. + K.O.E

Answer 17

Bank loans vs share capital = don’t have to relinquish any control of organisation
Bank loans vs retained profit = bank loan = profit can be given to shareholders
BANK LOANS ARE PREFERABLE

Question 18

What is venture capital + first method

Answer 18

Inviting other entrepreneurs to invest in the organisation
Comes in two forms
- they invest in return for share of ownership (like share capital) = they want to bring IP

Question 19

What is another avenue of venture capital

Answer 19

• finding venture capitalists who are willing to invest in a new business and they will benefit from IP
• very costly cos of the amount of money invested in risky