Sources Of Finance

Question 1

what do businesses need financing for

Answer 1

Starting up

Everyday running of the business

Expansion

Internal growth

Take overs

Equipment/machinery

Question 2

what is a short term of finance

Answer 2

paid back within one year

Question 3

what is a long term of finance

Answer 3

paid back over a period of time greater than one
year

Question 4

what is internal source of finance

Answer 4

Internal sources of finance come from within the
business.

This is the finance or capital which is generated internally by the business.

Question 5

how can a business internally finance its business

Answer 5

Retained profit

Net current assets

Sale of assets

Question 6

how is retained profit a source of finance

Answer 6

When a business makes a profit it can decide whether to take that money out of the business as a salary or a dividend
similarly they can decide to reinvest it back into the business to expand or buy new equipment etc.

Question 7

give advantages of using retained profit as source of finance

Answer 7

no interest charges

available immediately

avoids debt

no loss of ownership

Question 8

give disadvantages of using retained profit as source of finance

Answer 8

Could cause shareholder dissatisfaction as dividend
payment would be reduced

Once used it cannot be used for other purposes

Amount available may be limited

Question 9

how are net current assets a source of finance

Answer 9

If you have positive net current assets then this can be used by the business to fund day to day expenses.

Net current assets are current assets minus current liabilities.

Question 10

give advantages of using net current assets as a source of finance

Answer 10

Quick way of raising money. Selling off inventory reduces the costs related to holding it

Encourages the business to manage its cash flow

Question 11

give disadvantages of using net current assets as a source of finance

Answer 11

may have to accept a lower price for its inventory

Holding less stock could impact availability

Question 12

how are sale of assets a source of finance

Answer 12

A business can sell assets that they have in order to
receive a cash injection.

For example the business could have land, property or machinery that it could sell and then use that cash to invest in something else that may be more useful to the business.

Question 13

give advantages of using sales of assets as a source of finance

Answer 13

Good way of raising funds from assets no longer needed

Reduces capital tied up in useless assets

Question 14

give disadvantages of using sales of assets as a source of finance

Answer 14

May not receive full value of the asset if a quick sale is
needed

If the asset is needed then costs could increase to lease a
similar asset back

Question 15

what are external sources of finance

Answer 15

money that comes from outside a business.

When a company needs a lot of money and its
internal sources of finance are exhausted, the
company can look to external sources for that
finance.

Question 16

what are the different types of sources of finance

Answer 16

internal and external

Question 17

how is owners capital a source of finance

Answer 17

owner’s personal finances and is used to
finance the business.

Question 18

give advantages of owners capital as a source of finance

Answer 18

No interest
payments

No repayment
schedule

No loss of
ownership

Question 19

give disadvantages of owners capital as a source of finance

Answer 19

Limited amount available

Personal finances are at
risk

Could cause friction
between owners if all are
not able to contribute the
same amount

Question 20

how is a loan a source of finance

Answer 20

bank loan is money lent to an individual or business that is paid off with interest over an agreed period. Usually this rate of interest is fixed.

This means that the business knows in advance what the cost of borrowing will be and what monthly repayments will be required. This allows the business to manage their cash flow.

Question 21

give advantages of loans as a source of finance

Answer 21

Easy to budget as repayments are
pre-arranged

No loss of ownership

Question 22

give disadvantages of loans as a source of finance

Answer 22

Interest charged

Usually secured against an asset that
could be seized if loan is not repaid

Show financial statements to banks to
secure the loan

Question 23

how is crowdfunding a source of finance

Answer 23

involves many people investing small amounts of
money in a business, usually online.

Commonly used crowdfunding websites include Crowdfunder, GoFundMe and Kickstarter.

provides opportunities for individuals to start up a business
even if they don’t have access to other sources of funding.

It can be difficult to reach the funding target.

Question 24

give advantages of crowdfunding as a source of finance

Answer 24

No interest paid

Finance is received from a number of investors

Gauges peoples interest in the business

Question 25

give disadvantages of crowdfunding a source of finance

Answer 25

Someone could steal your idea from the crowdfunding platform

May not reach your crowd funding target as interest in
the business may not be there

Partial loss of ownership

Question 26

how is mortgage an external source of finance

Answer 26

long term source of finance. It is a sum of money borrowed from the bank that is secured against a property and paid back in instalments, usually over a long period of time I.e. 25 or 30 years.

Question 27

give advantages of using mortgage as an external source of finance

Answer 27

Large amounts of finance an be acquired and then repaid over a long period of time

No loss of ownership or control

Question 28

give disdavantages of using mortgage as an external source of finance

Answer 28

Interest charged on amount borrowed

Secured against asset that could be seized

Not suitable as a short term source of finance

Question 29

how is venture capital an external source of finance

Answer 29

money invested by an individual or group that is willing to take the risk of funding a new business in exchange for an agreed share of the profits.

Venture capital is usually used when there is an element of risk with the
business.

Question 30

give advantages of using venture capital as an external source of finance

Answer 30

Finance is made available along with advice and mentoring

Finance may be easier to obtain as venture capitalists are
usually high risk high reward people

Question 31

give disadvantages of using venture capital as an external source of finance

Answer 31

Loss of ownership and control

Conflicts may occur over the direction of the business

Question 32

how is debt factoring an external source of finance

Answer 32

business selling their outstanding invoices to a third party at a discounted price in order to bypass the hefty waiting times which are associated with invoice payments.

This means they receive the money they are owed quickly however it comes at a cost as the get a discounted amount from the debt factoring company.

Question 33

give advantages of using debt factoring as an external source of finance

Answer 33

Immediate cash flow: Debt factoring provides immediate cash to the business, which can
help to improve its liquidity and finance its ongoing operations.

No debt incurred: does not create additional debt for the business, as the cash is obtained by selling accounts receivable.

Improved creditworthiness: can improve the creditworthiness of the business by providing it with immediate cash flow to pay its bills and debts.

Question 34

give disadvantages of using debt factoring as an external source of finance

Answer 34

may provide limited funding, as the amount of cash that the business can obtain is typically limited to a percentage of the value of the accounts receivable.

Reputation risk: can damage the reputation of the business, as customers may view the sale of accounts receivable as a sign of financial distress.

Question 35

How is hire purchase an external source of finance

Question 36

Give advantages of using hire purchase as an external source of finance

Question 37

Give disadvantages of using hire purchase as an external source of finance

Question 38

How is leasing an external source of finance

Answer 38

Leasing is a way of renting an asset that the business requires, such as a coffee machine.

Monthly payments are made, and the leasing company is responsible for the provision and upkeep of the leased item.

Unlike hire purchase the item is not owned at the end of the payments by the business.

Question 39

Give advantages of using leasing as an external source of finance

Answer 39

agreements are generally flexible, and businesses can negotiate terms such as payment schedules,

payments are typically fixed, allowing businesses to budget and forecast more accurately.

allows businesses to transfer the risk of owning and maintaining the asset to the lessor, freeing up time and resources for other business activities.

requires a lower upfront cost than purchasing the asset outright, allowing businesses to conserve cash and invest it in other areas of the
business.

Question 40

Give disadvantages of using leasing as an external source of finance

Answer 40

Likely to cost more than buying outright due to interest charges and other fees

assets are not owned by the business, so the business has limited control over the asset and may face restrictions on how it can be used.

Question 41

Define trade credit

Answer 41

source of finance allows a business to obtain raw materials and stock but pay for them later.

Trade credit must be agreed with a supplier and forms a credit agreement with them.

Question 42

What are the terms and conditions of trade credit

Answer 42

credit limit - the maximum amount of credit available to the business.

credit period - the length of time the business has to pay what is owed, usually 30, 60 or 90 days

frequency of payment - how often payment is required, usually monthly

method of payment - the way in which the business makes payment

retrospective discount - a discount given when the business has purchased a certain amount of stock or raw materials

Question 43

Give advantages of using trade credit as an external source of finance

Answer 43

trade credit does not involve interest charges, making it a cost-effective way for businesses to access short-term financing.

can help businesses manage their cash flow by
allowing them to defer payment until a later date.

Regular use of trade credit can help businesses build strong relationships with their suppliers,
which can lead to other benefits such as preferential pricing and faster delivery times.

Question 44

Give disadvantages of using trade credit as an external source of finance

Answer 44

typically limited in terms of the amount of credit that suppliers are willing to extend to the business

Businesses may be limited in their choice of suppliers if they have limited credit history or poor payment track record.

if payments are not managed effectively, it can impact the business’s cash flow
negatively.

If the business is unable to make payments on the trade credit, it can damage its relationship with its suppliers and lead to a loss of credit in the future.

Question 45

How are grants an external source of finance

Answer 45

A grant is a fixed amount of money usually awarded by the government, EU (European Union) or charitable organisations.

Grants are given to a business on the condition that they meet certain criteria such as providing jobs in areas of high unemployment

Question 46

Give advantages of using grants as an external source of finance

Answer 46

Being awarded a grant can improve a business’s reputation and credibility with customers, suppliers, and investors.

Grants can provide funding for research and development, allowing businesses to explore innovative ideas and technologies.

grants are non-repayable, and businesses do not have to worry about repaying the funds they receive/ no interest payments

Question 47

Give disadvantages of using grants as an external source of finance

Answer 47

grant application process can be time-consuming and complex, requiring detailed information and supporting documentation.

Grants are typically provided for specific projects or activities and cannot be used for general operating expenses.

can sometimes alienate customers who may feel uncomfortable dealing with another business or pressured by aggressive lending companies.

Grants are highly competitive, and businesses must demonstrate that they meet the criteria for funding.

Question 48

How are donations an external source of finance

Answer 48

an extremely important source of finance for a non profit organisation such as a charity or social enterprise.

Donations are relied upon for the continual running and day to day upkeep of such organisations.

funds given voluntarily by individuals or organisations to support the work of a non-profit or social enterprise.

Question 49

Give advantages of using donations as an external source of finance

Answer 49

non-repayable, and non-profit organisations and social enterprises do not have to worry about repaying the funds they receive.

can come from members of the community who believe in the mission of the organisation, and can help build support and awarenesorganisationswork.

Donations can be used for a variety of purposes, giving non-profits and social enterprises flexibility in how they allocate the funds they receive.

Question 50

Give disadvantages of using donations as an external source of finance

Answer 50

Donors may place restrictions on how their funds can be used, limiting the flexibility of non-profits and social enterprises.

Non-profits and social enterprises may need to invest resources
into fundraising and donor management to solicit and track donations.

Donors may experience “donor fatigue,” where they become less willing to donate over time, particularly if they are solicited frequently.

uncertain, and non-profits and social enterprises cannot rely on them as a consistent source of funding.

Question 51

how is peer to peer lending an external source of finance

Answer 51

a way for people to lend money to individuals or businesses.

The lender lends their money to an organisation or individual. In return the lender receives interest on top of the amount lent out.

Question 52

Give advantages of using peer to peer lending as an external source of finance

Answer 52

provide access to finance to individuals and businesses who may have difficulty obtaining loans from traditional sources.

can offer competitive interest rates compared to traditional loans, making it an attractive option for borrowers.

Question 53

Give disadvantages of using peer to peer lending as an external source of finance

Answer 53

not as tightly regulated as traditional financial institutions, which can create risks for both borrowers and lenders.

carries the risk of borrower default, and lenders may not receive the full amount of their investment if a borrower is unable to repay the loan.

Question 54

How is invoice discounting an external source of finance

Answer 54

invoice discounting is a form of short-term borrowing against your outstanding invoices. It is usually used to help improve a company’s working capital and cash flow position.

These companies will lend you up to 95% of the value of the invoices, paying you the money in a matter of days rather than weeks. Once you receive payment from your customers, you pay back the loan

Question 55

Give advantages of using invoice discounting as an external source of finance

Answer 55

provides immediate cash for a business, improving its cash flow position and allowing it to invest in growth opportunities.

can be flexible, allowing a business to access funding as and when it is needed, without having to apply for a loan or line of credit.

can be confidential, allowing a business to maintain control over its relationship with its customers and avoid the negative perception associated with traditional debt financing.

can improve a business’s credit rating by providing it with a more stable cash flow and reducing its reliance on bank loans.

Question 56

Give disadvantages of using invoice discounting as an external source of finance

Answer 56

carries the risk of non-payment, as the third
party purchasing the invoices may not be able to collect payment from the customers.

can reduce the business’s relationship with its customers, as the third party purchasing the invoices may have different collection practices and policies than the business itself.

can be a complex process, requiring a significant amount of administrative work and documentation.

can carry high fees and interest rates, reducing the amount of funding available to the business.