sources of finance

Question 1

what are external sources of finance?

Answer 1

these are ways of raising finance from outside the business such as loans, overdrafts and share capital

Question 2

define debt factoring

Answer 2

a firm sells the right to collect the money it is owed to a factoring company in return for a payment about 75% of the value of the debt

Question 3

what’s an overdraft?

Answer 3

an agreement with the bank which allows a business to spend more than it has in its bank account

Question 4

what is retained profit?

Answer 4

the part of a firms profit that is reinvested in the business

Question 5

what is share capital?

Answer 5

money raised by issuing shares

Question 6

what are bank loans?

Answer 6

an amount which is borrowed for a certain period of time

Question 7

what is venture capital?

Answer 7

specialist firms that provide finance for businesses that may be too risky for other investors who want a share of the ownership of the company

Question 8

would a bank loan be internal/external and short/long term and why?

Answer 8

external
long term

large amounts being borrowed over a long time

Question 9

would an overdraft be internal/external and short/long term and why?

Answer 9

external
short term

not much overdraft offered and interest may be implemented, temporary borrowing

Question 10

would a sales of assets be internal/external and short/long term and why?

Answer 10

internal
long term

reinvest money

Question 11

6 factors which may influence decisions on sources of finance

Answer 11

• the reason the finance is needed
• how well established the business is
• the legal structure of a business
• the cost of finance
• flexibility
• control

Question 12

why may a new business find it difficult to get external funding?

Answer 12

new start up businesses have no initial sources of finance or have limited sources which is a big risk to potential investors

Question 13

explain and advantage to a plc of using loan finance rather than issuing more share capital to fund expansion

Answer 13

loans can be negotiated to meet a business’s specific requirements, and managers can plan for repayments within budgets. share capital also reduces control

Question 14

2 advantages of using crowd funding to start a new business

Answer 14

• cheap source of finance

- increasingly relevant as UK banks reduce short term loaning

Question 15

2 disadvantages of using crowd funding to start a new business

Answer 15

• unfamiliar source of finance

- may not be suitable to raise large amounts of capital

Question 16

what are internal sources of finance?

Answer 16

these are ways of raising finance from within the business such as retained profit