Sources of finance 2.1

Question 1

what is it meant by a ‘source of finance’

Answer 1

where the money comes from to fund a business

Question 2

give 4 examples of why finance is needed to start up a business

Answer 2

1. buying machines and materials
2. advertising
3. facility hire/rent
4. utilities

Question 3

give 4 examples of why finance is needed to grow a business

Answer 3

• marketing/advertising
• employee wages
• rent increase if expanding
• innovation

Question 4

give a short term source of finance for a business

Answer 4

trade credit

Question 5

give a medium term source of finance for a business

Answer 5

bank loans

Question 6

give a long term source of finance for a business

Answer 6

mortages

Question 7

give 3 internal sources of finance for a new business

Answer 7

• founder finance (the entrepreneur’s personal sources)
• retained profits
• friends and family

Question 8

give 3 external sources of finance for a new business

Answer 8

• business angels
• loans and grants
• bank overdraft

Question 9

give 3 internal sources of finance for an established business

Answer 9

1. retained profits
2. working capital
3. asset disposal

Question 10

give 3 external sources of finance for an established business

Answer 10

1. bank loans
2. debt factoring
3. supplier finance

Question 11

benefits of retained profits

Answer 11

• cheap
• flexible (management control how they are reinvested)

Question 12

drawbacks of retained profits

Answer 12

• hoarding cash is dangerous
• shareholders may prefer dividends if the business is not achieving sufficiently

Question 13

benefits of share issues

Answer 13

• able to raise substantial funds if the business has good potential
• broader range of shareholders
• lower financial risk because it is equity not debt

Question 14

drawbacks of share issues

Answer 14

• can be costly and time consuming
• existing shareholders may have their holdings diluted

Question 15

advantages of using a bank overdraft

Answer 15

• relatively easy to manage
• flexible because you can use cash flow when required
• only paid on the amount borrowed

Question 16

disadvantages of using a bank overdraft

Answer 16

• can be withdrawn with little to no notice
• as interest rate changes, interest charge varies
• higher interest rate than a bank loan

Question 17

advantages of using a bank loan

Answer 17

• greater certainty of funding
• lower interest rate than overdraft
• appropriate/useful for financing fixed assets

Question 18

disadvantages of using a bank loan

Answer 18

• requires security
• interest paid on the full amount outstanding

Question 19

what is a debunture

Answer 19

a form of bond or long term loan issued by a company with a fixed rate of interest

Question 20

what is venture capital

Answer 20

money donated by a group who are willing to take a risk and fund a new business in return for an agreed share of the profits

Question 21

advantages of venture capital

Answer 21

• can raise substantial amounts
• creates discipline

Question 22

disadvantages of venture capital

Answer 22

• requires a high return rate
• not long term because venture capitalists will aim to sell within 5-7 years
• loss of control

Question 23

what is crowd funding

Answer 23

gathering small amounts of money from a large group of people