Sources of Finance

Question 1

Dividends

Answer 1

Paid to shareholders for investing. It is not guaranteed dividends will be paid if there isn’t sufficient cash or profit.

Question 2

Preference Shares

Answer 2

For shareholders these are lower risk option than ordinary share but as a consequence offer a lower return

Question 3

Debentures

Answer 3

These are loans by debenture holders who receive interest for the term of the debenture.

Question 4

Bank Loans

Answer 4

Borrowing a fixed sum over a fixed term which can be secured on assets in the business or unsecured. Interest must be paid in addition. To the amount borrowed

Question 5

Bank Overdrafts

Answer 5

Represent a flexible source of finance and mean a business can spend more than they have in their bank account within a set limit.

Question 6

Mortgages

Answer 6

These are long-term loans,specifically for purchasing property

Question 7

Risk

Answer 7

All lenders have to decide on the level of risk a business presents. This is based on past experience, future predictions and on the current state of the business. The lender must decide how likely they are to be repaid and whether the likely return is worth the potential risk. In the role of the borrower, the business also has to weigh up the risks of any source of finance. The business must consider its financial needs, as well as implications associated with each source.

Question 8

Ordinary Shares

Answer 8

An ordinary shareholder receives a variable dividend based on profit in return for their investment.

Question 9

Internal Finance

Answer 9

The initial source of finance for a business, and comes from within the business