sources of finance

Question 1

retained profits

Answer 1

The owner reinvests profits made back into the business as equity.

Question 2

share issue

Answer 2

New shares can be issued to EXISTING shareholders

Question 3

sale of an asset

Answer 3

The business sells an asset

Question 4

bank overdraft

Answer 4

Allows a business to withdraw more money from its bank account than it has available.

Question 4

bank loan

Answer 4

A sum of money borrowed from the bank which is paid back in instalments with interest.

Question 5

mortgage

Answer 5

A sum of money borrowed from the bank that is secured against a property.

Question 6

new share issue

Answer 6

Limited companies may issue more shares in the organisation and obtain finance from their sale.

Question 7

debentures

Answer 7

Debentures are loans given to the business by individuals.
Interest is paid annually and the loan is paid back in full at an agreed date in the future.

Question 8

trade credit

Answer 8

Purchasing goods from suppliers and paying for them at a later date.

Question 9

debt factoring

Answer 9

The business sells unpaid customer invoices to a factoring company, such as a bank.

Question 10

grants

Answer 10

A fixed amount of money usually awarded by the government, or charitable organisations.

Question 11

hire purchase

Answer 11

Hire purchase allows a business to pay for an asset in instalments which is owned after the final payment.

Question 12

leasing

Answer 12

Leasing is a way of renting an asset that the business requires, such as a company car.

Question 13

venture capitalist

Answer 13

Venture Capital is investment received in return for a share in the business.

Question 14

crowdfunding

Answer 14

Involves getting small amounts of finance from an appeal made to the public.

Question 15

bank loan pro and con

Answer 15

• loan can be repaid over a long period which aids cash flow
• interest charges may affect cash flow

Question 15

bank overdraft pro and con

Answer 15

• flexible and can be arranged quickly
• high rate of interest for small sum

Question 16

mortgage pro and con

Answer 16

• large amount of finance raised quickly
• property can be lost to the lender if repayments are missed

Question 17

share issue pro and con

Answer 17

• finance raised does not need to be paid back
• new shareholders could mean loss of control

Question 18

debenture pro and con

Answer 18

• no loss of control in the business since lenders are not owners
• interest must be paid

Question 18

trade credit pro and con

Answer 18

• allows a business to make sales before having to pay for purchases
• the business can miss out on prompt payment discounts

Question 19

debt factoring pro and con

Answer 19

• saves time and effort collecting debts
• the business loses value on the debt since it is sold for less than it is worth

Question 20

grants pro and con

Answer 20

• very cheap since a grant does not need to be paid back
• business must meet specific criteria to qualify for a grant

Question 21

hire purchase pro and con

Answer 21

• avoids paying for the asset upfront
• the business does not own the item until all payments are made

Question 21

venture capitalist pro and con

Answer 21

• venture capitalists sometimes provide advice and support to help grow the business
• lenders may demand a higher return due to the higher risk of the investment

Question 22

leasing pro and con

Answer 22

• the leasing company is usually responsible for the upkeep of the leased item
• over time it can be more expensive and the business never owned it

Question 23

pro and con

Answer 23

• a quick way to raise finance and it gives access to investors
• a public request for investment risks the project being copied