Sources of finance

Question 1

Describe a bank loan

Answer 1

money borrowed from a bank which is paid back in instalments with interest overtime

Question 2

Advantages of a bank loan

Answer 2

paid back in monthly instalments

Question 3

Disadvantages of bank loan

Answer 3

interest is charged on the amount borrowed
the longer you borrow the more interest has to be paid

Question 4

Describe a commercial mortgage

Answer 4

obtained for purchasing property and paid back over 25 years

Question 5

Advantages of a commercial mortgage

Answer 5

paid back in monthly instalments

Question 6

Disadvantages of commercial mortgage

Answer 6

interest is charged on the amount borrowed
if instalments not paid property can be repossessed

Question 7

Describe bank overdraft

Answer 7

money loaned from a bank for a short period of time

Question 8

Advantages of bank overdraft

Answer 8

interest is calculated on a short daily basis

Question 9

Disadvantages of bank overdraft

Answer 9

any money placed in you account automatically reduce your overdraft balance
The bank can withdraw the overdraft at any time

Question 10

Describe leasing

Answer 10

renting equipment or property to allow your business to use them without purchasing

Question 11

Advantages of leasing

Answer 11

dont have to pay for repairs
saves large outlay of cash
equipment can be changed regularly

Question 12

Disadvantages of leasing

Answer 12

more expensive in the long run
goods will never be an asset
property leases can be for a long period of time

Question 13

Describe hire purchase

Answer 13

goods are immediately received and purchased by a deposit with the remaining amount paid in instalments

Question 14

Advantages of hire purchase

Answer 14

receive goods immediately
goods paid for in instalments
the full amount is not paid upfront so helps cashflow

Question 15

Disadvantages of hire purchase

Answer 15

deposits often required
don’t own goods until final payment is made
if instalments missed then goods can be reclaimed

Question 16

Describe venture capitalists/ business capital

Answer 16

successful entrepreneurs invest in business ventures which are risky

Question 17

Advantages of venture capitalists

Answer 17

benefit from experience of the venture capitalist
benefit from the contacts of the venture capitalists
poor credit ratings are often ignored by the venture capitalist

Question 18

Disadvantages of venture capitalists

Answer 18

have to give up full ownership of your business

Question 19

Describe a government grant

Answer 19

when money is received from the government to help set up your business to provide employment in an area.

Question 20

Advantages of government grant

Answer 20

does not have to be paid back

Question 21

Disadvantages of government grant

Answer 21

may have to set up in a particular area
have to meet certain criteria otherwise the grant may have to be repaid

Question 22

Describe sale of assets

Answer 22

when assets are sold that are no longer used

Question 23

Advantages of sale of assets

Answer 23

raise finance quickly
no interest is paid
does not have to be repaid

Question 24

Disadvantages of sale of assets

Answer 24

may not get true value for goods

Question 25

Describe retained profit

Answer 25

unused profits from the previous year after tax that are not given to shareholders in the form of dividends

Question 26

Advantages of retained profits

Answer 26

does not have to be paid back no interest rates have to be paid

Question 27

Disadvantages of retained profits

Answer 27

can only be used once shareholders may not agree to profit retention as it may impact the amount of profit available for their dividend payment

Question 28

Describe share issue

Answer 28

limited companies sell shares to new or potential shareholders on the stock market that does not have to be repaid shareholders receive a share of the profit in return for their investment

Question 29

Advantages of share issue

Answer 29

large amounts of finance can be raised shareholders have limited liability finance does not have to be paid back

Question 30

Disadvantages of share issue

Answer 30

if a profit is made then a dividend must be paid to shareholders limitation of how many shares can be sold share selling price can vary daily

Question 31

Describe trade credit

Answer 31

buying raw materials and paying on credit

Question 32

Advantages of trade credit

Answer 32

receive goods immediately can sell the goods and use the funds to pay for the raw materials

Question 33

Disadvantages of trade credit

Answer 33

sometimes interest is charged

Question 34

Describe debt factoring

Answer 34

the practice of selling your debts to another company for less than the true value

Question 35

Advantages of debt factoring

Answer 35

improved the cash flow of your business less time spend chasing debts do not have to employ staff to handle customer payments

Question 36

Disadvantages of debt factoring

Answer 36

full amount of debt is not received can damage your businesses reputation if the debt factoring company is not professional factors will only buy debts that are likely to be paid

Question 37

Describe crowd funding

Answer 37

the practice of funding a project or venture by raising money from a large number of people over the internet who each contribute a small amount

Question 38

Advantages of crown funding

Answer 38

large amounts of finance can be received also raises the profile of the cause

Question 39

Disadvantages of crowd funding

Answer 39

failed projects risk damaging the reputation

Question 40

Describe debentures for plc only

Answer 40

a debenture holder loans money to a company a debenture can be an individual or another company a fixed rate of interest and a repayment date is agreed the debenture holder receives the interest yearly the full amount is repaid at the end of the term

Question 41

Advantages of debentures

Answer 41

fixed rate of interest money is repaid at the end of the term large amounts of finance can be raised debenture holders are first in line to have their money repaid should the business be declared bankrupt

Question 42

disadvantages of debentures

Answer 42

even if loss is made the debenture holder must be paid interest debenture holders have the right to sell the business assets to have the money borrowed repaid