sources of finance

Question 1

Retained profits

Answer 1

Where profits from previous years are kept within the business

• good for short term and long term
• no need to pay interest on the money
• however you need to have enough profit
• shareholders may object as it would affect their dividends

Question 2

Rationalisation

Answer 2

Reorganisation of the business to make it more efficient

• selling off assets ti generate capital and then leasing them back when required
• no need to pay interest
• however the business no longer owns the asset.
• lease back introduces an additional cost to the business
• assets like cars and computers loose value over time

Question 3

Overdrafts

Answer 3

• easy to arrange
• flexible
• ability to borrow a little or a lot
• however high interest rates
• may be a fixed charge
• short term

Question 4

Debt factoring

Answer 4

Selling debts off to debt factors who give them less than 100% of the debt in cash

• fast/instant source of finance
• however the debt factoring company gets all of the money owed- business only gets a small proportion

Question 5

Bank Loans

Answer 5

adv:
- guaranteed the money for the duration of the loan
- only have to pay back the loan and interest
- usually lower interest than overdrafts
disadvantages:
- difficult to arrange
- keeping up with repayments can be difficult
- may have to pay a fee where you want to pay back the loan earlier

Question 6

Share capital

Answer 6

• selling percentage of your business to external shareholders
• long term finance
• money doesnt need to be repaid
• new shareholders can bring additional knowledge into the business
  however
• no longer own all of the business
• risk of takeovers
• may have to pay dividends to keep shareholders happy

Question 7

Venture capital

Answer 7

funding through professional investors (venture capitalists) who invest in potentially successful businesses

• can offer business advice
• long process of applying for the funding