Sources of Finance

Question 1

What is owner’s personal finance?

Answer 1

Includes personal savings and money borrowed from family and friends.

Question 2

What is retained profits?

Answer 2

A business holding back profits and previous years.

Question 3

What is sale of asset?

Answer 3

Selling something that the business no longer needs.

Question 4

What is sell and lease back?

Answer 4

Selling an asset and leasing (renting) it back.

Question 5

What is share issue?

Answer 5

Selling shares in the business. PLCs sell on the stock market. Ltds sell shares privately.

Question 6

What are debentures?

Answer 6

Debentures are loans given to the business by individuals. Interest is paid annually and the loan is paid back in full at an agreed date in the future.

Question 7

What is bank overdraft?

Answer 7

A facility which allows a business to spend more money than is in its bank account.

Question 8

What is trade credit?

Answer 8

Allows a business to buy goods from suppliers and pay for them at a later date.

Question 9

What is debt factoring?

Answer 9

A business sells its unpaid customer invoices to a factoring company then collects and keeps the customers’ debts.

Question 10

What are grants?

Answer 10

Money given to a business from central or local government, the EU or Prince’s Trust.

Question 11

What are bank loans?

Answer 11

A bank agrees to lend a business money for a specific purpose, for a fixed period of time. Regular repayment instalments are put in place.

Question 12

What is hire purchase?

Answer 12

A business can but an asset by paying an initial deposit and then monthly payments for a fixed period of time.

Question 13

What are mortgages?

Answer 13

A large sum of money borrowed from a bank or building society secured on a property.

Question 14

What are venture capitalists?

Answer 14

Organisations that invest in established businesses in return for equity (ownership percentage).

Question 15

What is crowd-funding?

Answer 15

Small amounts of money from a large number of people are raised to fund a new business or a project. This is typically done via the internet, e.g. Kickstarter.

Question 16

What are the advantages of owner’s personal finance?

Answer 16

This allows the owner to keep control of the business.

It can reduce the amount to be borrowed from other sources.

Question 17

What are the disadvantages of owner’s personal finance?

Answer 17

It can be difficult to withdraw savings once they are invested in the business.

There is a risk that the owner could lose their savings if the business fails.

Question 18

What are the advantages of retained profits?

Answer 18

This can be used to make larger purchases, such as assets or for bulk buying.

The business doesn’t go into debt.

Question 19

What are the disadvantages of retained profits?

Answer 19

A business can find it more difficult to grow if it regularly uses retained profits, especially to solve short-term cash-flow problems.

Question 20

What are the advantages of sale of assets?

Answer 20

Money can be raised from the sale of an asset to boost cash flow.

The money does not need to be repaid.

Question 21

What are the disadvantages of sale of assets?

Answer 21

If the finance is required urgently, the business may have to sell the asset for less than it is worth.

Question 22

What are the advantages of sell and lease back?

Answer 22

The use of the asset is retained, which might be essential to the business, e.g. selling and leasing back the main shop/factory/office.

The business passes over responsibility for maintaining and renewing equipment to leasing company.

Question 23

What are the disadvantages of sell and lease back?

Answer 23

Leasing over a long period of time can be expensive- ultimately, the business may pay back more than it received from the sale.

Question 24

What are the advantages of share issue?

Answer 24

Very large sums of money can be raised through the sale of shares.

The money does not need to be repaid.

Question 25

What are the disadvantages of share issue?

Answer 25

Dividends have to be aid to shareholders. It can be expensive to advertise and organise the sale of shares.

Question 26

What are the advantages of debentures?

Answer 26

Control of the business is retained. These can be paid back over a long time.

Question 27

What are the disadvantages of debentures?

Answer 27

Interest must be paid annually, even if a loss is made, unlike with shares where dividends are only paid out if profits are made.

Question 28

What are the advantages of a bank overdraft?

Answer 28

This is usually easy for a business to arrange with its bank. It allows a business to continue to pay business expenses, despite there being no money in its bank account.

Question 29

What are the disadvantages of a bank overdraft?

Answer 29

High interest rates are usually applied by the bank for borrowing money in this way. The overdraft can be withdrawn by the bank at any time and must then be repaid.

Question 30

What are the advantages of trade credit?

Answer 30

This allows a business to sell goods at a higher price and earn a profit before the bill needs to be paid. It helps a business to keep going when cash flow is poor.

Question 31

What are the disadvantages of trade credit?

Answer 31

Discount for prompt payment is lost. Suppliers will be reluctant to continue to offer credit if a business does not pay within the agreed credit period.

Question 32

What are the advantages of debt factoring?

Answer 32

Responsibility for collecting the debt is passed on to the factor, saving the company time and effort. Cash flow is improved by receiving an advanced payment of the debts from the factor.

Question 33

What are the disadvantages of debt factoring?

Answer 33

The business has to sell the customer debt for a reduced amount, i.e. it receives less money than is actually owed. Factoring companies are usually only interested in large amounts of debt.

Question 34

What are the advantages of grants?

Answer 34

These are often offered as an incentive and a way of helping a business get started or expand. The money does not need to be repaid.

Question 35

What are the disadvantages of grants?

Answer 35

They can be complicated to apply for and can require the business to meet certain requirements. Grants are usually one-off payments that are not repeated.

Question 36

What are the advantages of bank loans?

Answer 36

The business can budget for repayments. Purchases of essential equipment can be made in advance and paid back over a number of years.

Question 37

What are the disadvantages of bank loans?

Answer 37

Interest has to be repaid along with the loan amount. Small businesses may find it more difficult to secure a loan and often need to pay higher interest rates, as they are greater risk.

Question 38

What are the advantages of hire purchase?

Answer 38

Expensive equipment can be bought with only an initial deposit. The asset, e.g. delivery van, is owned by the business at the end of the repayment period.

Question 39

What are the disadvantages of hire purchase?

Answer 39

The business does not own the asset until the last instalment is paid. It can be an expensive form of borrowing if interest rates are high.

Question 40

What are the advantages of a mortgage?

Answer 40

It can be paid back over a long period of time, e.g. 25 years. The interest rate charged is often lower than the rate in a bank loan.

Question 41

What are the disadvantages of a mortgage?

Answer 41

Interest has to be repaid along with the loan amount. The mortgage provider owns the property until the last repayment is made. This means the business could lose the property if it does not keep up the repayments.

Question 42

What are the advantages of venture capitalists?

Answer 42

Large amounts of investment can be gained. Venture capitalists are willing to take on more risky investments than banks.

Question 43

What are the disadvantages of venture capitalists?

Answer 43

Venture capitalists have an equity stake, which means control and share of profits are given up.

Question 44

What are the advantages of crowd-funding?

Answer 44

Finance can be raised from individuals when banks see a venture as too risky. Some funds are donated, so there is nothing to repay.

Question 45

What are the disadvantages of crowd-funding?

Answer 45

There is a low success rate. Only a small percentage of crowd-funded ventures get off the ground, often because they have not reached their target amount. Privacy can be a problem as ideas become public and can therefore be copied.