Sources of Finance

Question 1

What are the two types of sources of finance?
1.
2.

Answer 1

1. Internal sources.
2. External sources.

Question 2

Internal sources:
1.
2.
3.

Answer 2

1. Retained profit.
2. Net current assets.
3. Sale of assets.

Question 2

What are 2 advantages of retained profit:
1.
2.

Answer 2

1. No interest.
2. Available immediately.

Question 3

What are 2 disadvantages of retained profit:
1. Amount available may be ____________.
2. Reduces ______________________ which may cause dissatisfaction.

Answer 3

limited

payments to shareholders

Question 4

What is an advantage of net current assets:

Answer 4

Encourages the business to manage cash flow effectively.

Question 5

What is a disadvantage of net current assets:
________________________ can affect the firm’s ability to meet ___________________.

Answer 5

Lower stock holdings
customer needs

Question 6

What is an advantage of the sale of assets?

Answer 6

Very quick cash injection.

Question 7

What is a disadvantage of the sale of assets?
Can increase costs in the long run if the _______________________________.

Answer 7

same asset is needed in the future

Question 8

What are the 5 main external sources:
1.
2.
3.
4.
5.

Answer 8

1. Loans.
2. Crowd-funding.
3. Mortgages.
4. Venture capital.
5. Debt factoring.

Question 9

Which source in the following list is not an external source of finance:
1. Hire purchase.
2. Leasing.
3. Trade credit.
4. Grants.
5. Donations.
6. Owner’s capital.
Peer-to-peer lending,
Invoice discounting.

Answer 9

6. Owner’s capital.

Question 10

What are 2 advantages of loans:
1.
2.

Answer 10

1. Regular pre-agreed repayments make budgeting easy.
2. Ownership is not lost.

Question 11

What are 2 disadvantages of loans:
1.
2.

Answer 11

1. Interest is charged.
2. Assets can be seized if a loan is secured on an asset.

Question 12

What are 2 advantages of crowd-funding:
1. Potential for a large amount of finance to be made because of the _______________________.
2. _________________________.

Answer 12

large pool of investors
No interest is paid

Question 13

What are 2 disadvantages of crowd-funding:
1.
2.

Answer 13

1. Partial loss of ownership.
2. Finance not guaranteed.

Question 14

What are 2 advantages of a mortgage?
1.
2.

Answer 14

1. Large amounts of finance can be repaid over a prolonged period of time.
2. No ownership is lost.

Question 15

What are 2 disadvantages of a mortgage?
1.
2.

Answer 15

1. Interest is charged.
2. Not suitable as a short-term source of finance.

Question 16

What are 2 advantages of venture capital:
1. Mentoring will be offered alongside the investment.
2. Venture capitalists see ___________________________________.

Answer 16

Mentoring

potential in high-risk investment

Question 17

What are 2 disadvantages of venture capital:
1.
2.

Answer 17

1. Partial loss of ownership.
2. Conflict can arise between the entrepreneur and
   venture capitalist.

Question 18

Debt-factoring is when a business sells it s debts to another company for quick access to money.

What is a disadvantage of debt-factoring:
The business only receives a ______________ of the ___________________, therefore reducing profits.

Answer 18

percentage
amount owed

Question 19

What are 2 advantages of hire-purchase:

1. Regular instalments make _______________.
2. Spreads the ________________________________.

Answer 19

budgeting easier

cost of an asset over its useful life

Question 20

What are 2 disadvantages of hire-purchase:

1. Overall amount paid for the use of an asset is likely to be __________________________.
2. Only suitable for __________________.

Answer 20

higher than if purchased outright

low cost assets

Question 21

What are 2 advantages of leasing:
1. Responsibility for _______________ the asset stays with the _____________.
2. Spreads the cost of an asset over its life to ________________________________.

Answer 21

maintaining
supplier

avoid paying a lump sum upfront

Question 22

What is a disadvantage of leasing:

Answer 22

You never own the asset, so payments are ongoing.

Question 23

Trade credit is when a supplier allows a business to purchase assets now and pay for them later.

What are 2 advantages of trade credit:
1. __________ the need to pay for assets, therefore aiding _______________.
2. No loss of ________________.

Answer 23

Delays
cash flow

ownership

Question 24

What are 2 disadvantages of donations:
1.
2.

Answer 24

1. Likely to be small amounts.
2. Business operations will be closely monitored.

Question 25

Peer-to-peer lending is when a business borrows money from another business and pays interest.

What is an advantage and disadvantage of peer-to-peer lending:
1.
2.

Answer 25

1. Terms can be negotiated.
2. Limited amounts over a short period.

Question 26

Invoice discounting is when a supplier will offer a discount on orders out of loyalty.

It ___________________________ with the supplier,
but is often only ________________________________.

Answer 26

strengthens the relationship

available when payment is upfront