Sources of Finance

Question 1

What are the sources of finance of the private sector?

Answer 1

Owner’s equity
Bank loan
Grant
Re-invested profits
Mortgage
Leasing
Hire purchase
Bank overdraft
Trade credit
Issuing shares (Ltds only)

Question 2

What are the sources of finance of the public sector?

Answer 2

Taxation (corporation tax, income tax, VAT)
Trading activities (e.g. admission fee to leisure centre)

Question 3

What are the sources of finance of the third sector?

Answer 3

Donations
Grants
Membership fees/Subscriptions (clubs and associations)
Trading activities (e.g. shop sales)

Question 4

Describe owner’s equity

Answer 4

This refers to money invested by the owner/partner into the business.

Question 5

Describe the advantages of owner’s equity

Answer 5

The money does not have to be repaid.

No interest has to be paid.

Question 6

Describe the disadvantages of owner’s equity

Answer 6

There may be insufficient money to fund the business.

Question 7

Describe bank loan

Answer 7

This refers to a sum of money lent from the bank which has to be repaid with interest over an agreed number of years.

Question 8

Describe the advantages of a bank loan

Answer 8

The money can be obtained in one lump sum.

Repayments can be spread over several years so budgeting is easier.

Question 9

Describe the disadvantages of a bank loan

Answer 9

Interest has to be paid.

Small businesses may find it hard to obtain a bank loan and may have to pay higher rates of interest.

Question 10

Describe a grant

Answer 10

This refers to a sum of money received from the Local Council, Government or Lottery for a specific purpose.

Question 11

Describe the advantages of a grant

Answer 11

The money does not have to be repaid.

A large amount of money can be received at one time.

Question 12

Describe the disadvantages of a grant

Answer 12

There will be certain restrictions as to what the money can be used for.

Time consuming and complex application process.

Question 13

Describe re-invested profits

Answer 13

This refers to profit left over at the end of the year that has not been shared with owner(s).

Question 14

Describe the advantages of re-invested profits

Answer 14

There are no extra costs e.g. interest to be paid.

Question 15

Describe the disadvantages of re-invested profits

Answer 15

There may be insufficient money to fund the business.

Question 16

Describe a mortgage

Answer 16

This refers to a loan specifically for the purchase of property.

Question 17

Describe the advantages of a mortgage

Answer 17

Amount can be repaid over a long period of time (e.g. 25 years).

Question 18

Describe the disadvantages of a mortgage

Answer 18

Interest has to be paid.

If repayments are not made then the property may be repossessed.

Question 19

Describe leasing

Answer 19

This refers to paying a monthly fee for the use of equipment/vehicles (asset).

Question 20

Describe the advantages of leasing

Answer 20

Can obtain the asset without a large financial outlay.

Repairs are carried out by the leasing company as part of the agreement.

Can keep upgrading to the latest models/versions.

Question 21

Describe the disadvantages of leasing

Answer 21

The business will never own the asset.

May end up paying more in the long run than purchasing the asset.

Question 22

Describe hire purchase

Answer 22

This refers to buying an asset and paying it back over several months (e.g. 48 or 60 months). An initial down payment is normally required.

Question 23

Describe the advantages of hire purchase

Answer 23

Allows businesses to buy assets without needing the full amount up front.

Once full payments have been made the asset is owned.

Question 24

Describe the disadvantages of hire purchase

Answer 24

The asset is not fully owned until the last payment is made.

The total paid is more than the value of the asset due to interest charges.

Question 25

Describe a bank overdraft

Answer 25

This refers to withdrawing more money from your bank account than you have available.

Question 26

Describe the advantages of a bank overdraft

Answer 26

Useful as a short-term source of finance to overcome cash flow problems.

You are not tied into an agreement which requires repayment over several years.

Question 27

Describe the disadvantages of a bank overdraft

Answer 27

An expensive form of borrowing with high interest charges.

Additional costs incurred if not pre-arranged with the bank.

Question 28

Describe trade credit

Answer 28

This refers to when goods/materials can be bought from suppliers but are not paid for until a later date (e.g. 30 days credit).

Question 29

Describe the advantages of trade credit

Answer 29

Can buy goods and sell them on before payment is required.

Provided payment is made within the agreed number of months then no interest is charged.

Question 30

Describe the disadvantages of trade credit

Answer 30

May lose out on prompt payment discounts.

May gain a reputation as a slow payer.

Question 31

Describe issuing shares

Answer 31

This refers to selling shares to friends and family in return for part-ownership of the company.

Question 32

Describe the advantages of of issuing shares

Answer 32

Large amounts of additional finance can be raised.

Question 33

Describe the disadvantages of issuing shares

Answer 33

Dividends have to be paid which reduces the retained profit for the company.

New shareholders will have a say in how the business is run (ownership is diluted).