Sources of Finance

Question 1

What is long term finance?

Answer 1

finances the whole business over many years. eg share capital, retained profits, venture capital, mortgage, long term bank loans.

Question 2

What is medium term finance?

Answer 2

finances major projects or assets with a long life. eg bank loans, leasing, hire purchase, government grants.

Question 3

What is short term finance?

Answer 3

finances day to day trading of the business. eg bank overdraft, trade creditors, short term bank loans, factoring.

Question 4

What is finance needed for?

Answer 4

business set up, day to day trading, growth and development.

Question 5

What factors affect the type and amount of finance required?

Answer 5

what the finance is for, the cost of the finance, the flexibility of the finance, business organisational structure.

Question 6

What are the main sources of finance for a new start up business?

Answer 6

retained profit, friends and family, bank loan, bank overdraft, business angels, loans and grants.

Question 7

What are some internal sources of finance?

Answer 7

retained profits, working capital, asset disposals.

Question 8

What are some external sources of finance?

Answer 8

issue shares, bank loan/overdraft, debentures, venture capital, suppliers.

Question 9

What is debt factoring?

Answer 9

the selling of debts to a third party business.

Question 10

What are the advantages of debt factoring?

Answer 10

generates cash quickly when immediately needed. reduces pressure of collecting debt.

Question 11

What are the disadvantages of debt factoring?

Answer 11

will reduce income as debt factoring company receives a percentage of the money.

Question 12

What is founder finance?

Answer 12

the personal source of finance commonly used by entrepreneurs. eg inheritances, redundancy payments.

Question 13

What are the advantages of founder finance?

Answer 13

easy to access and control. no debt or interest.

Question 14

What are the disadvantages of founder finance?

Answer 14

unlimited liability - could loose everything.

Question 15

What are retained profits?

Answer 15

profit that is put back into the business, usually to help it grow.

Question 16

What are the advantages of retained profits?

Answer 16

no debt or interest. quick and easy. flexible.

Question 17

What are the disadvantages of retained profits?

Answer 17

not always enough to make a difference. danger of hoarding cash.

Question 18

What is working capital?

Answer 18

the amount of money that a business has available to conduct its day to day activities. calculated using current assets - current liabilities.

Question 19

What are the advantages of working capital?

Answer 19

easily available. low interest.

Question 20

What are the disadvantages of working capital?

Answer 20

negatively impacts cash flow.

Question 21

What is asset disposal?

Answer 21

the removal of a long term asset form the company’s records.

Question 22

What are the advantages of asset disposal?

Answer 22

quick boost of finance.

Question 23

What are the disadvantages of asset disposal?

Answer 23

not all business will have spare assets. can no longer use assets if needed.

Question 24

What is venture capitalists?

Answer 24

specialist investors in private companies, that provide a business with loans and share capital for growth.

Question 25

What are the advantages of venture capitalists?

Answer 25

can raise substantial amounts, brings better discipline to businesses management and strategy, specialists.

Question 26

What are the disadvantages of venture capitalists?

Answer 26

high rate of return. loss of control is they take a majority share. not a permanent investment, usually 5-7 years.

Question 27

What is issuing shares?

Answer 27

company issues new shares, shareholders buy the new shares, company has more cash and shareholders.

Question 28

What are the advantages of issuing shares?

Answer 28

able to raise substantial funds if the business had good prospects. broader base of shareholders. equity rather than debt = lower risk finance structure.

Question 29

What are the disadvantages of issuing shares?

Answer 29

costly and time consuming. existing shareholders holdings may be diluted. equity has a cost of capital that is higher than debt.

Question 30

What are bank loans?

Answer 30

a fixed amount of money given to the business by the bank that has to be paid back over time with interest.

Question 31

What are the advantages of bank loans?

Answer 31

greater certainty of funding, lower interest rate than overdraft, appropriate method of financing fixed assets.

Question 32

What are the disadvantages of bank loans?

Answer 32

requires security (collateral), interest paid on full amount outstanding, harder to arrange.

Question 33

What are bank overdrafts?

Answer 33

bank lets business owe it money when balance is below zero, in return for a high rate of interest.

Question 34

What are the advantages of bank overdrafts?

Answer 34

easy to arrange. interest only paid on amount below zero. not secured on assets. flexible - use as cash flow requires.

Question 35

What are the disadvantages of bank overdrafts?

Answer 35

can be withdrawn at short notice. high interest rate. interest charges can vary as rates change.

Question 36

What are debentures?

Answer 36

a form of long term loan issued by a company, usually with a fixed rate of interest.

Question 37

What are the advantages of debentures?

Answer 37

no loss of control. long term.

Question 38

What are the disadvantages of debentures?

Answer 38

interest must be paid even if company makes a loss.

Question 39

What is trade credit?

Answer 39

suppliers provide goods and services in advance of payment. better relationship with suppliers may mean businesses can obtain a longer payment plan.

Question 40

What are the advantages of trade credit?

Answer 40

better cash flow management, improved supplier relationships, increased purchasing power, no interest.

Question 41

What are the disadvantages of trade credit?

Answer 41

short term, must be paid off quickly. usually small amounts.