sources of finance

Question 1

what are the roles of the finance department?

Answer 1

-Ensuring bills,
-Paying wages and salaries,
-Managing the budgets for the other departments, e.g. marketing,
-Chasing up customers who have not yet paid,
-Creating final accounts, e.g. income statements,

Question 2

what are the factors that will influence the types of finance a business decides to use?

Answer 2

-The purpose of finance,
-Objectives of an organisation,
-Amount of finance required,
-The type of business, not all sources are available to all businesses,
-Length of time the finance is required for,

Question 3

what are the main sources of finance?

Answer 3

-Bank overdraft,
-Bank loan,
-Grant,
-Mortgage,
-Share issue,
-Owner investment,
-Loan from family or friends,
-Hire purchase,
-Crowd funding,
-Leasing,
-Retained profit,
-Venture capital,

Question 4

what is bank overdraft?

Answer 4

a facility that will allow you to withdraw more money from your account than is available. a bank overdraft is a short-term source of finance

Question 5

what are the ADV. and disADV. of overdraft?

Answer 5

ADVANTAGES:
-can be arranged quickly,
DISADVANTAGES:
-expensive as high rate of daily interest is charged,
-usually only available for small sums of money,

Question 6

what is a bank loan?

Answer 6

a long term source of finance. It is a fixed amount of money that is given to a business by the bank that must be repaid over time with interest, usually in monthly installments,

Question 7

what are the ADV. and disADV. of bank loans?

Answer 7

ADVANTAGES:
-can be arranged quicky,
-loan can be repaid over a long period of time,
DISADVANTAGES:
-interest has to be paid in addition to the loan amount,

Question 8

what is a grant?

Answer 8

a fixed amount of money usually awarded by the government which are given to a business on the condition that they meet certain criteria such as providing jobs in areas of high unemployment

Question 9

what are the ADV. and disADV. of a grant?

Answer 9

ADVANATGES:
-does not need to be paid back,
DISADVANTAGES:
-business needs to meet certain criteria,
-it is time-consuming to apply for grants and to complete the paperwork,

Question 10

what is a mortgage?

Answer 10

a long term source of finance. it is a sum of money borrowed from the bank that is secured against a property and paid back in instalments, usually over a long period of time

Question 11

what are the ADV. and disADV. of a mortgage?

Answer 11

ADVANTAGES:
-mortgage is given over a for a long period of time,
-large amounts of finance can be raised quickly,
DISADVANTAGES:
-interest is charged on the loan,
-property can be lost to the mortgage lender if repayments are missed,

Question 12

what is a share issue?

Answer 12

a source of finance that is only available to private or public limited companies. such businesses can decide to issue more shares in the company and obtain finance from their sale,

Question 13

what are the ADV. and disADV. of a share issue?

Answer 13

ADVANTAGES:
-finance raised does not need to be paid back,
-large amounts of money can be raised,
DISADVANTAGES:
-shareholders need to be paid a dividend each year,
-shareholders become part owners of the business,

Question 14

what is an owner investment?

Answer 14

money that is invested by the owner from their own personal funds

Question 15

what are the ADV. and disADV. of an owner investment?

Answer 15

ADVANTAGES:
-does not need to be paid back,
-full control of the business is maintained,
DISADVANTAGES:
-personal savings may be lost if the business is unsuccessful,

Question 16

what is a loan from family or friends?

Answer 16

a loan which is given from family or friends and may not need to be paid back

Question 17

what are the ADV. and disADV. of a loan from family or friends?

Answer 17

ADVANTAGES:
-may not need to be paid back,
DISADVANTAGES:
-money may be lost if the business is not successful,
-arguments may occur between family members

Question 18

what is a hire purchase?

Answer 18

a deposit is paid and the remaining amount for the asset is paid in monthly instalments over a et period of time, the business does not own the item until all payments are made

Question 19

what is crowd funding?

Answer 19

involves getting small amounts of finance from a large amount of people, this is usually done through social media or crowd funding websites. crowd funding investors may:
-donate money,
-get rewards for their investments,
-receive a share of the profits,

Question 20

what are the ADV. and disADV. of crowd funding?

Answer 20

ADVANTAGES:
-access to large amount of investors,
-fast way to raise finance,
DISADVANTAGES:
-a public request for investment risks your project being copied by competitors,
-if the target amount isnt reached the money is returned to investors and the company gets nothing

Question 21

what are the ADV. and disADV. of a hire purchase?

Answer 21

ADVANTAGES:
-expensive assets can be purchased and paid back over time,
DISADVANTAGES:
-interest is charged on hire purchase items,
-equipment is not owned until the final payment is made,

Question 22

what is leasing?

Answer 22

leasing is a way of renting an asset that the business requires. Monthly payments are made and the leasing company is responsible for the provision and upkeep of leased items

Question 23

what are the ADV. and disADV. of leasing?

Answer 23

ADVANTAGES:
-large amounts of money are not required up front to lease machinery,
-the leasing company are responsible for repairs and maintenance,
DISADVANTAGES:
-over time it can be a more expensive way to obtain assets,
-assets are never owned by the business,

Question 24

what is retained profit?

Answer 24

profit that has been made by the business in previous years that is then reinvested back into the company

Question 25

what are the ADV. and disADV. of retained profit?

Answer 25

ADVANTAGES:
-does not need to be repaid,
DISADVANTAGES:
-for profits to build up to use in this way can take too long and good business opportunities missed

Question 26

what is venture capital?

Answer 26

money that investors provide to a company that is starting up or expanding, venture capital is usually used when there is an element of risk within the business

Question 27

what are the ADV. and disADV. of venture capital?

Answer 27

ADVANTAGES:
-available for more risky investments,
DISADVANTAGES:
-venture capitalists may want a share of the business meaning some control may be lost,
-a larger return may be required due to the high risk nature of the investment,