Sources of finance

Question 1

What is Long term finance

Answer 1

Finances that support the whole business over many years

Question 2

What is medium term finance

Answer 2

Finances major projects or assets with a long-life

Question 3

What is short term finance

Answer 3

Finances day-to-day trading of the business

Question 4

Example of long term finance

Answer 4

Share capital, retained profits

Question 5

Example of medium term finance

Answer 5

Bank loans, leasing

Question 6

Examples of short term finance

Answer 6

Bank overdraft, short term bank loans

Question 7

Why does a start up business find it harder to source finance

Answer 7

The business is new and unproven and therefore has much higher risk to potential finance providers

Question 8

What is owners funds, P and C

Answer 8

Money out into the business by the owner
P- No need to pay interest on the money.
C- Owner may not have enough funds to meet the needs of the business.
Could have been invested elsewhere, earning a higher profit.

Question 9

what are retained profits, P and C

Answer 9

Money kept in the business by the owners.
P- No need to pay interest on the money.
C-Could have been invested elsewhere, earning a higher profit.
-Business may not have enough retained profit to meet its needs

Question 10

Selling assets, P and C

Answer 10

Items owned by the business are sold and the money made is used to finance the business.
P- The business is using money it already has-so no need to take loans or pay any interest.
C- The business has to have something worth selling for this to be an option.
-The business may sell something they later need.

Question 11

what is overdraft, P and C

Answer 11

The bank allows the business to draw more money from their bank account than what they actually have in it.
P- Very quick to arrange
-A good short term solution to a cash flow problem.
C-Only suitable for smaller amounts and has to be repaid within a short amount of time.
Interests are paid.

Question 12

What is Trade Credit, P and C

Answer 12

Items are bought from suppliers on a ‘buy now pay later’ basis.
P-Gives business more cash to use in the immediate future.
C- Can only be used to buy certain goods.
-Bills usually have to be settled within 30,60 or 90 days.

Question 13

what is debt factoring, P and C

Answer 13

Company sells a debt it is owed to a debt factoring company who pay the business a smaller sum than they were owed.

Question 14

what is debt factoring, P and C

Answer 14

Company sells a debt it is owed to a debt factoring company who pay the business a smaller sum than they were owed.
P-Allows business to get money for debts that might otherwise never have been paid.
- Saves the business chasing customers for money owed.
C- Time consuming to arrange.
- Business receives less money than it was originally owed, affecting profitability.

Question 15

What is leasing, P and C

Answer 15

Used to help obtain new equipment e.g cars, the business rents the item from its owner.
P- Cost of asset is spread over its life.
-No need to find a lump-sum of money to purchase it.
C-May be more xepsnive in the long run than buying the asset.

Question 16

What is venture capital, P and C

Answer 16

Venture capitalists invest in small, risky businesses
P- Can raise money from them even when banks refuse to lend to the business
C-Risky for the venture capitalist.
-The VC may want some control over the business operations.

Question 17

What is a hire purchase, P and C

Answer 17

An item bought on finance, repayments are made each month until the final payment when the item becomes the property of the firm.
P-Flexible method- can hand back the item if no longer required.
C- High interest often charged
-Item doesn’t belong to the business until end of term.

Question 18

Positive and negatives of government grants

Answer 18

p- No need to repay the grant.
N- Limited funds available, restrictions on what the money can be used for.

Question 19

What is a mortgage, P and C

Answer 19

Long term loan provided by a bank in order to buy a property.
P-Only method available to buy a property
C- Large sums of interest.

Question 20

what is issuing shares, P and C

Answer 20

A share in the business is sold to an individual or another business. This money then used to purchase assets.
P-Cheaper than a loan, no need to repay the money invested.
C- Have to pay the share holders a share of future profits.

Question 21

Limitations of cash flow forecast

Answer 21

Based on future inflows and outflows therefore may be inaccurate.
Demand may be over or under estimated

Question 22

What is limited liability

Answer 22

An investors financial commitment is limited to the total amount invested or praised in share capital

Question 23

What is unlimited liability

Answer 23

The owners of a business are responsible for the total amount of debt of the business