Sources of Finance

Question 1

Internal Finance:

Answer 1

Internal sources of finance are funds found inside the business; include:
- Retained profits
- The sale of non-current assets that are no longer required

Question 2

Retained profits:

Answer 2

Are profits which are reinvested in the business.

Question 3

Advantages of retained profits:

Answer 3

-Cheap source of finance, no cost involved
- The owner determines how the funds will be used.

Question 4

Disadvantages of retained profits:

Answer 4

• Return on investment may take time and the owner/s may be unable to draw funds for living expenses
• Can lead to a shortage of cash

Question 5

The sale of non-current assets that are no longer required: advantages:

Answer 5

• Eases cash flow problems
• Could enhance the overall profitability if the particular asset isn’t helping overall business success.

Question 6

The sale of non-current assets that are no longer required: Disadvantages:

Answer 6

-Difficult to sell quickly
- May be forced to accept a much lower price than current market value.

Question 7

External finance:

Answer 7

External finance is found from sources outside the business; Including:
- Credit card
- Trade credit
- Bank overdraft
- Leasing
- Term loan
- Mortgage
- Asset loan
- Grant
- Crowdfunding

Question 8

Credit card finance:

Answer 8

A plastic card issued by a bank or other financial institution allowing the holder to purchase goods or services on credit.

Question 9

Advantages of credit card financing:

Answer 9

• Can help build a business’s credit rating
• They work in any currency
  -Can offer interest-free days finance

Question 10

Disadvantages of credit card financing:

Answer 10

-High rates of interest charged if full balance is not paid by the due date
- Accessing cash is expensive
- Surcharges may be charge.

Question 11

Trade credit:

Answer 11

Given by a supplier to a business when purchasing items such as raw materials and inventory.

Question 12

Advantages of trade credit:

Answer 12

• Cheap source of finance, no cost involved
• Discounts may be offered for early payments

Question 13

Disadvantages of trade credit:

Answer 13

Failure to meet payment deadlines can be costly as interest may be charged
- Business reputation is ruined

Question 14

Bank overdraft:

Answer 14

An agreement with a bank to be allowed to withdraw more money from their bank account than has been deposited.

Question 15

Advantages of bank overdraft:

Answer 15

• Ensures timely payments and avoidance to late payments penalties
• Interest is calculated only on the amount of funds used

Question 16

Disadvantages of bank overdraft:

Answer 16

• Interest costs are higher than other sources of borrowing

Question 17

Leasing:

Answer 17

An agreement to rent an item for a fixed number of months or years.

Question 18

Term loan:

Answer 18

A sum of money borrowed from a bank or other financial institution which will be paid back over an agreed number of years.

Question 19

Mortgage:

Answer 19

A special type of loan for buying property where monthly payments are spread over a number of years.

Question 20

Asset loan:

Answer 20

A finance option where the asset is used as security for the loan amount.

Question 21

Grant:

Answer 21

A sum of money given from charities or the government to help businesses get started.

Question 22

Crowdfunding:

Answer 22

Raising funds online through social medial or dedicated crowdfunding websites.