Sources of Finance

Question 1

Describe owner’s personal finance.

Answer 1

Includes personal savings and money borrowed from family and friends.

Question 2

Advantages of Owner’s Personal Finance.

Answer 2

This allows the owner to keep control of the business.
It can reduce the amount to be borrowed from other sources.

Question 3

Disadvantages of Owner’s Personal Finance.

Answer 3

It can be difficult to withdraw savings once they are invested in the business.
There is a risk that the owner could lose their savings if the business fails.

Question 4

Describe Retained Profits.

Answer 4

A business holding back profits from previous years.

Question 5

Advantages of Retained profits.

Answer 5

This can be used to make larger purchases, such as assets or for bulk buying.

The business doesn’t go into debt

Question 6

Disadvantages of Retained profits.

Answer 6

A business can find it more difficult to grow if it regularly uses retained profits, especially to solve short-term cash-flow
problems.

Question 7

Describe Sale of Assets.

Answer 7

Selling something that the business no longer needs.

Question 8

Advantages of Sale of Assets.

Answer 8

Money can be raised from the sale of an asset to boost cash flow.
The money does not need to be repaid.

Question 9

Disadvantages of Sale of Assets.

Answer 9

If the finance is required urgently, the business may have to sell the asset for less than it is worth.

Question 10

Describe sell and lease back.

Answer 10

Selling an asset and leasing (renting) it back.

Question 11

Advantages of sell and lease back

Answer 11

The use of the asset is retained, which might be essential to the business, e.g. selling and leasing back the main shop/ factory/office.
The business passes over responsibility for maintaining and renewing
equipment to the leasing company.

Question 12

Disadvantages of share issue

Answer 12

Leasing over a long period of time can be expensive – ultimately, the business may pay back more than it received from the sale.

Question 13

Describe trade credit

Answer 13

Allows a business to buy goods from suppliers and pay for them at a later date.

Question 14

Advantages of trade credit

Answer 14

This allows a business to sell goods at a higher price and earn a profit before
the bill needs to be paid.

It helps a business to keep going when cash flow is poor.

Question 15

Disadvantages of trade credit

Answer 15

Discount for prompt payment is lost.

Suppliers will be reluctant to continue to offer credit if a business does not pay
within the agreed credit period.

Question 16

Describe grants.

Answer 16

A sum of money given to an organisation by central/local government, the EU or Prince’s trust that doesn’t have to be paid back.

Question 17

Advantages of grants

Answer 17

These are often offered as an incentive and a way of helping a business get started or expand.
The money does not need to be repaid.

Question 18

Disadvantages of grants

Answer 18

They can be complicated to apply for and can require the business to meet certain requirements.
Grants are usually one-off payments that are not repeated.

Question 19

Describe bank loan.

Answer 19

A bank agrees to lend a business money for a specific purpose, for
a fixed period of time. Regular repayment instalments are put in
place.

Question 20

Advantages to a bank loan

Answer 20

The business can budget for the repayments.
Purchases of essential equipment can be made in advance and paid back
over a number of years.

Question 21

Disadvantages to a bank loan

Answer 21

Interest has to be repaid along with the loan amount.
Small businesses may find it more difficult to secure a loan and often need to pay higher interest rates, as they are a greater risk.

Question 22

Describe a mortgage

Answer 22

A large sum of money borrowed from a bank or building society secured on a property.

Question 23

Advantages to a mortgage

Answer 23

It can be paid back over a long period of time, e.g. 25 years.
The interest rate charged is often lower than the rate on a bank loan.

Question 24

Disadvantages to a mortgage.

Answer 24

Interest has to be repaid along with the loan amount.
The mortgage provider owns the property
until the last repayment is made. This means the business could lose the property if it does not keep up the repayments.