Sources Of Finance

Question 1

What is retained profits?

Answer 1

When a business saves a portion of its profits and reinvests back into the company

Question 2

What are advantages of retained profits?

Answer 2

-no paying back interest on external borrowing so no cost
-profits belong to the company, so owner is in control

Question 3

What is disadvantage of retained profits?

Answer 3

Relying on profit is risky, as some months a business may not make profits

Question 4

What is sale of assets?

Answer 4

When a business sells items that they no longer need for example machinery or transport
They can then use this money to reinvest into other areas of the business

Question 5

What are advantages of sale of assets?

Answer 5

-no paying back interest on external borrowing so no cost
-profits belong to the company, so owner is in control

Question 6

What are disadvantages of sale of assets?

Answer 6

-may be difficult or may rake time to sell the assets
- of the finance is required urgently, the business may have to sell the asset for less than its worth

Question 7

What is share issue?

Answer 7

-a source of finance that is only available to private or public limited companies
-businesses can decide to issue more shares in the company and obtain finance from their sale

Question 8

What are advantages of share issue?

Answer 8

-finance raised does not need to be paid back
-large amounts of finance can be raised

Question 9

what are disadvantages of share issue?

Answer 9

-shareholders need to be paid a dividend each year
-shareholders become part owners of the business

Question 10

What is bank overdraft?

Answer 10

Facility that will allow you to withdraw more money from your account than is available

Question 11

What is advantages of bank overdraft?

Answer 11

-can usually be arranged quickly which can help immediate cash flow problems
-allows the business to continue paying expenses, despite their being no finance in bank account

Question 12

What are disadvantages of bank overdraft?

Answer 12

-can be expensive to pay back
-usually only available for small amounts of money

Question 13

What is bank loan?

Answer 13

-fixed amounts of money that is given to a business by the bank that has to be repaid over time with interest

Question 14

What are advantages of bank loan?

Answer 14

-can usually be arranged quickly
-loan can be repaid back over a long period of time which allows business to budget for repayments

Question 15

What are disadvantages of bank loan?

Answer 15

-interest has to be paid back on the loan
-small businesses may find it hard to secure a loan and often need to pay higher interest rates

Question 16

What is commercial mortgage?

Answer 16

-long term source of finance
-sum of money by borrowed from the bank which is secured against a business property and paid back in monthly instalments

Question 17

What are advantages of commercial mortgages?

Answer 17

-mortgage is given for a long period of time
-large amounts of finance can be raised quickly
-fixed interest rates are available so organisation knows what monthly payments will be

Question 18

What are disadvantages of commercial mortgages?

Answer 18

• interest is charged on the loan
  -property can be lost to mortgage lender if repayments are missed
  -variable interest rates can mean fluctuating monthly payments
  -large deposit often needed

Question 19

What is debt factoring?

Answer 19

-short term sources of finance where firms sell their unpaid customer invoices to a factoring company
-the factoring company then collects and keeps customers debts

Question 20

What are advantages of debt factoring?

Answer 20

-time and effort is saved as the company is no longer required to recover unpaid debts as they have been passed on to the factor

Question 21

What were disadvantages of debt factoring?

Answer 21

Finance is lost from the business as unpaid debts are sold at a reduced value

Question 22

What are debentures?

Answer 22

-loans given to the business by individuals through the stock market

Question 23

What are advantages of debentures?

Answer 23

-control of the business is not lost
-large amounts of capital can be raised and payed back over time

Question 24

What are disadvantages of debentures?

Answer 24

-interest must be payed annually even if the company makes a loss
-if the business fails to make the repayments, the debenture holder can seize company assets

Question 25

What are grants?

Answer 25

-fixed amounts of money usually awarded by the government
-given ti business on the condition they meet certain criteria

Question 26

What are advantages of grants?

Answer 26

-doesn’t need to be repaid
-usually given in one sum

Question 27

What are disadvantages of grants?

Answer 27

-it is a one off payment
-they can be complicated to apply for and it could be hard to meet the criteria

Question 28

What are venture capitalists?

Answer 28

-someone who invests their own money in a company that is starting up
-usually used when there is an element of risk in the business

Question 29

What are advantages of venture capitalists?

Answer 29

-businesses with a lower credit rating can secured finance from a reputable source
-large amounts of finance can be raised

Question 30

What is a disadvantage of venture capitalists?

Answer 30

Part ownership of the business could be required to secure finance

Question 31

What is crowd funding?

Answer 31

-getting small amounts of finance from a large amount of people

Question 32

What are advantages of crowd funding?

Answer 32

-access to large amount of investors when bank see a venture as too risky
-large amount of finance can be raised and some funds are donated so there is nothing to repay

Question 33

What are disadvantages of crowd funding?

Answer 33

A public request for investment risks your project being copied
-if the targeted amount isn’t reached the finance is returned to investors