Sources Of Finance

Question 1

What is a grant?

Answer 1

A fixed sum of money given to the business by some other agency normally a government body, to be used for a specific purpose

Question 2

What is a bank overdraft?

Answer 2

Money a business can take out of its account when it’s amount balance is at zero. They are required to agree with this with the bank in advance and it will often cost them more than a bank loan.

Question 3

What is trade credit?

Answer 3

A supplier will deliver supplies (raw materials) to the firm and allow them to pay for the goods at a later date

Question 4

What is factoring

Answer 4

If a business gives trade credit to their customers and they fail to repay the business, it often means the business can’t repay their own debts. In this situation a business can sell the debt that a customer owes to a third party for a reduced cost

Question 5

What is hire purchase

Answer 5

A firm will hire equipment and pay for it in instalments. After the last payment the firm takes ownership of the good.

Question 6

What is leasing

Answer 6

The firm rents a building of a piece of equipment for an agreed period of time

Question 7

What is a bank loan

Answer 7

A fixed sum of money given to the business by the bank which could be repaid in fixed instalments over a specific period of time with interest added.

Question 8

What is a mortgage?

Answer 8

This is a Loan given to firms who wish to purchase premises and is repaid in instalments with interest.

Question 9

What is owners savings

Answer 9

This is the funds saved by the owner and interested in the business

Question 10

What is share issue

Answer 10

The firm releases more shares in the firm to existing or prospective shareholders. This is ONLY used for a LTD/PLC

Question 11

What is a venture capitalist

Answer 11

These are private investors who proved finance where banks decide it is too risky

Question 12

What is debenture

Answer 12

Where a group of companies will give a Plc a long term loan to be repaid with fixed interest for a period of time. The full amount is then repaid

Question 13

What is a sale of an asset?

Answer 13

The firm will sell off a piece of equipment that has not been used eg machines

Question 14

What are the advantages and disadvantages of a sale of an asset?

Answer 14

Adv
Don’t have to borrow money or repay interest.

Disadv
Once sold asset you no longer have it

Question 15

What are the advantages and disadvantages of a grant

Answer 15

Adv

Does not have to be repaid

Disadv

Comes with conditions attached that you are required to fulfil. If not then you have to give it back

Question 16

What are the advantages and disadvantages of a bank overdraft

Answer 16

Adv

Helps firm deal with cash flow issues as you can take money out of their account when balance is zero.

Disadv

The bank can withdraw facility whenever they want. Can work out more expensive than a loan due to interest rate

Question 17

What are the advantages and disadvantages of trade credit

Answer 17

Adv

Helps with cash flow as business don’t need to pay for goods upfront

Disadv

Normally business loses out on discounts for immediate payment

Question 18

What are the advantages and disadvantages of factoring

Answer 18

Adv

Helps businesses cash flow as they receive advance payment of invoice

Disadv

Business doesn’t receive full amount of original invoice of factor

Question 19

What are the advantages and disadvantages of hire purchase

Answer 19

Adv

Business receives item up front to use whilst they are making instalments

Disadv

Business doesn’t own item until last payment is made and normally works out more expensive due to interest payments

Question 20

What are the advantages and disadvantages of leasing

Answer 20

Adv
This equipment can be changed when it becomes obsolete or only used when required therefore not tying up finance with an outright purchase.

Disadv
Business NEVER owns equipment if used for extended period. Can work out more expensive than outright purchase.

Question 21

What are the advantages and disadvantages of a bank loan

Answer 21

Adv
Business receives a lump sum of money up front and can spread repayments over extended period of time

Disadv
Interest charged. Paying more money back than was borrowed. Small businesses charged with higher rates of interest.

Question 22

What are the advantages and disadvantages of mortgage

Answer 22

Adv
Same as bank but you own the property.

Disadv
If don’t keep up with repayments bank can take over ownership of property which may mean business loses use of premises.

Question 23

What are the advantages and disadvantages of owners savings

Answer 23

Adv
Allows businesse to keep control of finances and reduces need to borrow and incur interest payments

Disadv
Once invested in business owner risks losing it if business fails

Question 24

What are the advantages and disadvantages of share issue

Answer 24

Adv
Allows business to raise lathe sums of finance that do not need to be paid back.

Disadv
Process of releasing shares - expensive and dilutes value of existing shares.

Question 25

What are the advantages and disadvantages of venture capitalist

Answer 25

Adv
Most likely to provide business with finance when banks deem a loan to be too risky.

Disadv
Normally change high interest rates for loan and want part ownership in return for finance

Question 26

What are the advantages and disadvantages of debenture

Answer 26

Adv
Allows business to raise lathe sums of money with interest repayments spread over long period of time.

Disadv
If business making loss interest must be paid and debenture holders have right to sell business assets in order for loan to be repaid.