Sources of finance

Question 1

Internal - Retained profit

Answer 1

Profit kept in the business to fund future expenses

Question 2

Pro’s and Con’s of Retained profit

Answer 2

Pro’s - no interest charges, available immediately, only available up to the amount already accumulated by the business and therefore avoids debt, no loss of ownership.
Con’s - amount available may be limited, reduces payments to shareholders which may cause dissatisfaction, once used it is not available for alternative purposes.

Question 3

Internal - Net current assets

Answer 3

Current assets minus current liabilities shows the money available in the business to fund day to day expenditure.

Question 4

Pro’s and Con’s of Net current assets

Answer 4

Pro’s - encourages the business to manage cash flow effectively.
Con’s - can put pressure on customers as shorter term credit terms are offered and this negatively affects relationships with suppliers if longer credit terms are negotiated, lower stock holdings can affect the firms ability to meet customer needs.

Question 5

Internal - Sales of assets

Answer 5

Selling an item of worth owned by a business in order to achieve an immediate cash injection.

Question 6

Pro’s and Con’s of Sales of assets

Answer 6

Pro’s - no interest charges, reduce capital tied up in assets, releasing it for other purposes, can mean disposing of an asset no longer of use to a business.
Con’s - It is likely that the amount received is not a true reflection of the asset, can increase costs in the long run if an asset needs to be leased back.

Question 7

External - Owners capital

Answer 7

This is money invested into the business from the owners personal savings

Question 8

Pro’s and Con’s of Owners capital

Answer 8

Pro’s - no interest payments or need to repay, high level of commitment from the owner.
Con’s - amount available may be limited, if there is more than one owner this could cause friction if everyone is not able to contribute the same amount.

Question 9

External - Loans

Answer 9

Money borrowed from a financial institution normally for a set period of time and for a specific purpose, interest payable on the loan.

Question 10

Pro’s and Con’s of Loans

Answer 10

Pro’s - regular pre-agreed payments making planning and budgeting relatively easy, ownership or control is not lost.
Con’s - interest charged, rates fluctuate, asset it is secured against can be seized if payments are missed, interest paid regardless.

Question 11

External - Crowd funding

Answer 11

Involves attracting investment from a large number of speculative investors many of whom may invest relatively small amounts. Normally make use of the internet to attract investors

Question 12

Pro’s and Con’s of Crowd funding

Answer 12

Pro’s - offers the ability to raise finance from a large number of investors, no interest paid as investors only rewarded if the business is successfully sold on at a later date.
Con’s - partial loss of ownership, no guarantee that the crowd fund will attract sufficient investment to meet the proposal.

Question 13

External - Mortgages

Answer 13

Long term loans, around 25 years, secured against specific asset e.g. a building. Interest will be payable on a mortgage

Question 14

Pro’s and Con’s of Mortgages

Answer 14

Pro’s - large amount of finance can be raised and repaid over a long time, ownership or control is not lost
Con’s - interest is charged on amount borrowed, rates fluctuate, secured against a asset, paid interest regardless of whether a profit is being made, not suitable for small amounts or as a short term source.

Question 15

External - Venture capital

Answer 15

Investment from a experienced entrepreneur in return for a stake in the business

Question 16

Pro’s and Con’s of Venture capital

Answer 16

Pro’s - finance provided by a business professional who will often offer advice and mentoring alongside investment, often risk takers and may see the potential in a high risk investment that other investors including banks may not be willing to invest in.
Con’s - partial loss of ownership and control, conflict can arise between entrepreneur and venture capitalist regarding direction and running of the business.

Question 17

External - Debt factoring

Answer 17

Involves the selling on of a businesses debts to a third party in order to receive the cash quickly. The factor company pays the business a percentage of the money owed and takes on responsibility to chase the debts which need to be repaid.

Question 18

Pro’s and Con’s of Debt factoring

Answer 18

Pro’s - speeds up the flow of cash into the business from debts, the factor company takes on the risk of bad debt.
Con’s - only receive a percentage of the amount owed therefore reducing profits, can give wrong impression or alienate customers.

Question 19

External - Hire purchase

Answer 19

involves paying to use an asset in instalments to spread the cost over its useful life and hence provide a source of finance, asset remains the property of the seller until the final instalment has been paid.

Question 20

Pro’s and Con’s of Hire purchase

Answer 20

Pro’s - avoids the need to pay lump sum for use of an asset. Regular instalments make planning and budgeting easier, spreads cost of an asset over its useful life.
Con’s - overall amount paid for use of an asset is higher then if purchased outright, only suitable for low cost assets e.g. cars not buildings.

Question 21

External - Leasing

Answer 21

Involves paying to use an asset in instalments to spread the cost over its useful life and hence providing a source of finance.

Question 22

Pro’s and Con’s of leasing

Answer 22

Pro’s - responsibility for maintaining and repairing asset stays with the supplier, spreads the cost over its life to avoid paying upfront.
Con’s - overall amount paid for use of an asset is likely to be higher then if purchased outright, never actually own the asset and therefore payments are ongoing.

Question 23

External - Trade credit

Answer 23

Period of time offered by suppliers to allow customers to purchase a good or service now and pay at a later date

Question 24

Pro’s and Con’s of Trade credit

Answer 24

Pro’s - delay the need to pay for goods and services, therefore adding cash flow, no loss of ownership or control.
Con’s - potential loss of discounts offered for cash payments, only suitable as a short term source of finance.

Question 25

External - Grants

Answer 25

Lump sum provided to a business by the government or another organisation to be used for a specific purpose.

Question 26

Pro’s and Con’s of grants

Answer 26

Pro’s - no need to repay and no interest charges, no loss of ownership or control
Con’s - often requires a lengthy application process, might only be rewarded if certain conditions are met.

Question 27

External - Donations

Answer 27

Sums of money given voluntarily to a charity or social enterprise.

Question 28

Pro’s and Con’s of donations

Answer 28

Pro’s - no need to repay and no interest charges, no loss of ownership or control.
Con’s - likely to be small amounts, unpredictable

Question 29

External - Peer to peer lending

Answer 29

involves one business person lending money to another business person in return for interest payments,

Question 30

Pro’s and Con’s of peer to peer lending

Answer 30

Pro’s - interest rates can be lower then lending from more traditional financial institutions, fixed rate of interest can be agreed making it easier to plan and budget.
Con’s - amount available may be limited and provided for a short period of time only

Question 31

External - Invoice discounting

Answer 31

Reductions offered to customers making a product or service cheaper, often applied as a percentage.

Question 32

Pro’s and Con’s of Invoice discounting

Answer 32

Pro’s - no need to repay and no interest charges, no loss of ownership or control, reduces costs to the business so increases profit.
Con’s - often available if purchases are paid in cash, which affects cash flow.