Sources of finance

Question 1

Sources of finance

Answer 1

Equity financing: This involves the sale of ownership in the company, typically in the form of shares, to raise capital.

Retained earnings: This involves using the profits generated by the business to finance its operations, growth, and investment.

Grants: This involves obtaining funds from government agencies, non-profit organizations, or other sources, typically to support specific projects or initiatives.

Trade credit: This involves obtaining goods or services from suppliers and paying for them later, typically within a defined credit period.

Question 2

Internal sources of finance

Answer 2

Retained Profit
Owners investment
Sales reinvested

Question 3

External sources of finance

Answer 3

Bank Loan
Government Grant
Trade Credit

Question 4

Short-term sources of finance

Answer 4

Overdraft
Loan
Trade Credit
Hire Purchasing
Factoring

Question 5

Long-term sources of finance

Answer 5

Long term loan
Leasing
Issue of shares
Debentures
Retained Profit

Question 6

How does time affect the source of finance chosen

Answer 6

If the money was needed within a short period of time then short term sources would be used, as it can take a long time to get money otherwise.

Question 7

How does the legal structure of a business affect the source of finance chosen

Answer 7

If the business was a Sole Trader then it could not issue shares and gain money that way. Also banks may be less likely to give loans out to sole traders as its more risky

Question 8

Quantitive factors affecting the source of finance chosen

Answer 8

Cost of capital: The cost of capital is the rate of return required by a lender or investor in exchange for providing financing.

Size of the required funding: The size of the required funding can influence the choice of financing, as some sources may be more suitable for larger funding requirements

Repayment period: The repayment period refers to the length of time over which the business is expected to repay the financing.

Interest rate: The interest rate is the cost of borrowing money, and it can vary depending on the type of financing and the creditworthiness of the business

Question 9

Qualitative factors affecting the source of finance chosen

Answer 9

Control: The type of financing chosen by a business can affect the level of control it retains over its operations.

Flexibility: Some sources of finance may be more flexible than others, allowing a business to adjust the amount of financing it has access to, or the terms and conditions of the financing, as needed.

Speed: The speed with which a business can obtain financing can be an important factor in its choice of financing.

Reputation: The reputation of the lender or investor can also be an important factor in a business’s choice of financing.

Question 10

External influences that affect the source of finance chosen

Answer 10

Economic Situation
Interest Rates
Technological factors
Government Regulations

Question 11

evaluate sources of finance for a business and its stakeholders

Answer 11

Cost: The cost of financing, including interest rates and fees, should be compared across different sources of finance to determine which is the most affordable.

Availability: The availability of financing should be considered, as some sources of finance may be more readily available than others. For example, a business may be able to obtain a loan from a bank more easily than it can obtain equity financing.

Repayment terms: The repayment terms of the financing, including the length of the loan, the repayment schedule, and the method of repayment, should be evaluated to determine whether they are manageable for the business.