Sources of Finance

Question 1

define internal sources of finance

Answer 1

money obtain within the business and is easier to access by business already stablished

Question 2

define personal funds

Answer 2

source of finance for sole traders that comes mostly from their own personal savings

Question 3

personal funds A + D

Answer 3

A:
- sole trader knows exactly how much money is available
- provides the sole trader with much more control over finance
- doesnt rely on anyone else + no pay back to anyone
D:
- large risk for the sole trader since its their life savings, straining family or personal life
- if savings are not enough, might be diff to maintain the business or start it

Question 4

retained profit

Answer 4

profit that remains after paying dividends and expenses - long term

Question 5

retained profit A+D

Answer 5

A:
- its cheap bc no bank loans
- permanent source of finance
- owners have complete control + dont rely on financial institutions
D:
- doesnt work for start-ups bc they dont make profit yet
- if the retained profit is not enough, might be diff to keep up the business
- high retained profit = not paying enough money to shareholders

Question 6

sale of assets

Answer 6

when a business sells their unwanted and unused assets to raise funds

Question 7

sale of assets A+D

Answer 7

A:
- raising cash from tied up capital in unused assets
- no interest rates
D:
- doesnt work for new business/start ups bc they have no established assets
- time consuming to find costumers to sell the asset

Question 8

define external sources of finance

Answer 8

money obtained from sources outside the business, mainly from financial institutions or individuals

Question 9

share capital

Answer 9

money raised from the sale of shares of a LIMITED COMPANY

Question 10

share capital A+D

Answer 10

A:
- it is a permanent source of finance, doesn’t need to be redeemed
- no interest rates
D:
- shareholders will demand dividends
- for PUBLIC LIMITED COMPANIES the ownership might change hands via stock exchange

Question 11

Loan Capital

Answer 11

money sourced from a financial institution where interests are charged to the loan + might be variable or fixed

Question 12

loan capital A+D

Answer 12

A:
- is accessible + can be arranged quickly for a specific purpose
- interest is spread out over a predetermined period of time = the business doesnt pay all in one lump sum.
- large orgs might negotiate interest rates (lower them)
- owners still have full control, ownership doesnt change
D:
- repayment is not optional, even if the business is making a loss
- collateral might be established before placing the loan
- no repayment = seizure of assets

Question 13

Overdrafts

Answer 13

when a lending institution allows a business to withdraw more money than it currently has in its account + interests are placed to the overdrawn amount

Question 14

overdrafts A+D

Answer 14

A:
- allows a business to spend more money than what they currently have + good for short term debts
- it is a flexible source of finance
- cheaper than a loan since interest only applies to the amount overdrawn
D:
- banks can request for repayment with very short notice
- since its flexible and variable, the bank might increase its interest rate

Question 15

Trade Credit

Answer 15

agreement between businesses that the buyer of goods/services to pay at a later date -> 30-90 days

Question 16

trade credit A+D

Answer 16

A:
- business is left with a good cash flow since they didnt pay immediately
- no interest rates
D:
- no discounts bc they are paying later
- might lead to a bad relationship between the buyer and the seller = refusing to engage in the future

Question 17

crowdfunding

Answer 17

when a business venture/project is funded by a large amount of people, each one contributing with a small amount of money

Question 18

crowdfunding A+D

Answer 18

A:
- Good marketing since platforms are online + people can share your project
- access to multiple investors + getting feedback and guidance
- owners are in full control of what they put out in the campaign and the amount theyre asking for
D:
- strong competition + detailed plan attack
- requirements not met = project not gonna be seen
- fees need to be paid
risk of failure
- other pathway for business having trouble with placing a loan

Question 19

Leasing

Answer 19

when a business allows a firm to use an assets for a determined period of time w/o having to purchase it with cash.

Question 20

leasing A+D

Answer 20

A:
- lessor takes care of the asset, pays for maintenance and repairs
- doesnt requiere high initial outlays to purchase the asset
- perfect for when u need the asset for a specific short time
D
- might turn out to be more expensive than actually purchasing the asset
- leased asset cannot act as a collateral for a business seeking a loan as an additional source of finance

Question 21

microfinance providers

Answer 21

institutions that provide banking services for low-income or unemployed individuals/groups that would otherwise have no access to financial services.
it can change lives and give out hope to many.

Question 22

microfinance A+D

Answer 22

A:
- promotes self sufficiency and entrepreneurship
- do not requiere a collateral
- they provide loans quickly with less formalities
- extensive portafolio of loans
D
- no legal representation = harsh recovery methods
- smaller loans
- interest rates are high

Question 23

Business angels

Answer 23

(SHARKS)
highly affluent people who provide financial capital to small start-ups in return for ownership or share capital in their business.

Question 24

business angels A+D

Answer 24

A
- more open to negotiation, risk taking attitude
- no repayment or interest required, they just want a ownership stake
- offer valuable knowledge = expertise + good financial capital
D
- might assume a large degree of control or ownership in the business, diluting the entrepreneurs ownership
- they might expect a substancial return of their investment in the first few years