sources of finance

Question 1

owners equity

Answer 1

money available from personal savings, friends and family
+ no interest
- risky and can’t be invested elsewhere
best for small start ups

Question 2

retained profit

Answer 2

business savings
+ doesn’t need to be repaid
- limited and comes w opportunity cost
best for expansion

Question 3

sale of assets

Answer 3

selling anything of value (machinery, equipment, etc)
+ no interest and can dispose of underused assets
- no longer have those assets
best for raising finance quickly

Question 4

trade credit

Answer 4

suppliers allow a business to pay later on
+ no interest
- limited, only works in short term, need good relationship w supplier
best for cash flow problems

Question 5

overdraft

Answer 5

banks allow a business to spend money they haven’t got (go below zero)
+ flexible
- high interest, doesn’t work in long term, needs to be set up beforehand w bank

Question 6

leasing

Answer 6

borrowing equipment/ premises/ vehicles instead of paying outright for them
+ much lower outlay, stay up to date w new models
- more expensive in long term, regular monthly payments

Question 7

loans

Answer 7

sum of money lent to a business by a bank
+ can generate large amounts of finance
- interest, regular payments need to be made

Question 8

venture capital

Answer 8

other entrepreneurs invest into the business in return for shares
+ immediate cash injection
- loss of control, have to pitch themselves to investors
best for risky businesses

Question 9

share capital

Answer 9

finance raised through the sale of shares on the stock market
+ immediate cash injection
- loss of control, have to give away % of profits or pay dividends
best for long term or expansions

Question 10

online collaborative funding

Answer 10

firms set a target of money to be raised and people can invest via the internet
+ access to share capital / unsecured loans without past credit rating
- takes time to arrange, may not reach target
best for innovative start ups and tech developments