Sources of Finance

Question 1

Why do businesses need finance?

Answer 1

To buy fixed assets

Question 2

What are 2 examples of fixed assets?

Answer 2

Factories & Machinery

Question 3

What is internal finance?

Answer 3

Money within the business

Question 4

What is external finance?

Answer 4

Money that comes from sources outside the business

Question 5

What does the source of finance depend on? 4 things

Answer 5

The legal structure of the business
Amount of money required
Level of risk involved
Short or long term

Question 6

What is retained profit?

Answer 6

Profit that can be retained and built up over the years for later investment

Question 7

What is a advantage of retained profit?

Answer 7

Don’t have to pay interest on the money

Question 8

Why may shareholders object to the method of retained profit?

Answer 8

May wish to receive profits as dividends

Question 9

What is rationalisation?

Answer 9

When managers reorganise the business to make it more efficient

Question 10

How can business rationalise?

Answer 10

Selling some of assets to generate capital

Question 11

What is a disadvantage of selling assets?

Answer 11

That the business no longer owns and leasing is another cost.

Question 12

What is an overdraft?

Answer 12

Where a bank lets a business have a negative amount of money on their account

Question 13

What is a advantage of a overdraft?

Answer 13

Easy to arrange and flexible

Question 14

What is the main disadvantage of a bank overdraft?

Answer 14

High rates of interest - can also be a fixed charge

Question 15

Is bank overdrafts internal or external source of finance?

Answer 15

External

Question 16

What is debt factoring?

Answer 16

When banks and other institutions take unpaid invoices off the hands of the business and give cash to the business

Question 17

What is a advantage of debt factoring?

Answer 17

Instantly get money they are owed

Question 18

What is a disadvantage of debt factoring?

Answer 18

The debt factoring company keeps some of the money owed as a fee

Question 19

Is debt factoring internal or external source of finance?

Answer 19

External

Question 20

What is a bank loan?

Answer 20

Businesses can borrow a fixed amount of money and pay it back over a fixed period of time with interest

Question 21

Are loans good long-term or short-term?

Answer 21

Long-term for start-up businesses

Question 22

What are 3 advantages of bank loans?

Answer 22

Guaranteed the money for the duration of loan
Only have to pay back loan and interest
Interest charges lower than an overdraft

Question 23

What are the 3 disadvantages of bank loans?

Answer 23

Difficult to arrange
Keeping up with repayments could be difficult
Might have to be charged if they pay loan early

Question 24

Who is share capital available for?

Answer 24

Limited companies

Question 25

Is bank loans internal or external?

Answer 25

External

Question 26

What is share capital?

Answer 26

Money raised by selling shares in the business

Question 27

What is an advantage of share capital?

Answer 27

New shareholders can bring additional expertise to the business

Question 28

What is the disadvantage of using share capital?

Answer 28

Original owner no longer owns all of the business

Question 29

What is venture capital?

Answer 29

Funding in the form of share or loan capital that is invested in a business that is thought to be high risk.

Question 30

Who are venture capitalists?

Answer 30

Professional investors

Question 31

What is crowdfunding?

Answer 31

A method of financing a business using contributions made by a large number of people.

Question 32

Is crowdfunding external or internal?

Answer 32

External

Question 33

Is share capital external or internal?

Answer 33

External