sources of finance

Question 1

What are sources of finance?

Answer 1

• owners’ capital
• bank loan
• overdraft
• mortgage
• grant
• re-invested profits
• hire purchase
• leasing
• trade credit
• factoring
• issue shares (plc or ltd)

Question 2

describe owner’s capital

Answer 2

This is the amount of money invested by the owner/partner in the business

Question 3

give advantages of owner’s capital

Answer 3

1. the money does not have to be repaid

2. no interest has to be paid

Question 4

give a disadvantage of owner’s capital

Answer 4

may not have enough money

Question 5

describe what a bank loan is

Answer 5

money obtained from a bank which has to be repaid with interest over an agreed number of years

Question 6

advantages of a bank loan

Answer 6

1. the money can be obtained in one lump sum

2. repayments can be spread over several years

Question 7

disadvantage of bank loan

Answer 7

1. the loan must be repaid - with interest

Question 8

describe overdraft

Answer 8

This is when you have insufficient funds in your bank account to pay your bills and therefore using the bank’s money. This should be arranged in advance otherwise additional costs will be incurred. Interest is charged daily on the overdrawn amount.

Question 9

advantages of overdraft

Answer 9

1. useful as short term source of finance to overcome cash flow problems.
2. you are not tied into an agreement which requires payment over several years

Question 10

disadvantage of overdraft

Answer 10

1. an expensive form of borrowing with high interest charges and costs especially if the facility is not arranged in advance

Question 11

describe mortgage

Answer 11

a loan specifically for the purchase of property

Question 12

advantage of mortgage

Answer 12

amount can be repaid over many years eg 25

Question 13

disadvantage mortgage

Answer 13

1. repayments may be high due to interest rates

2. if payments are not made then the property may be repossessed

Question 14

describe grant

Answer 14

an amount received from the local council, government or EU for a specific purpose

Question 15

advantages grant

Answer 15

1. money does not have to be repaid

2. a large amount of money can be received at one time

Question 16

disadvantage grant

Answer 16

may be certain restrictions as to what the money can be used for

Question 17

describe re-invested profits

Answer 17

left over profits which are kept within the business ie the sole trader/partner has not taken them out for their own use (drawings) or shareholders have not received them as dividends

Question 18

advantage re-invested profits

Answer 18

there are no extra costs eg interest to be paid

Question 19

disadvantages re-invested profits

Answer 19

there may be insufficient money to fund the business

Question 20

describe hire purchase

Answer 20

allows a business to buy an asset eg delivery van and pay it back over several moths eg 48. an initial down payment is often required

Question 21

advantage hire purchase

Answer 21

1. allows businesses to buy assets with only a small initial payment
2. once full payments have been made the asset is owned

Question 22

disadvantage hire purchase

Answer 22

1. the asset is not fully owned until the last payment is made
2. the total paid is more than the price of the asset

Question 23

describe leasing

Answer 23

often used to obtain equipment or cars and is similar to renting

Question 24

advantage leasing

Answer 24

1. can obtain the asset without a large financial outlay
2. repairs are carried out by the leasing company free of charge
3. upgrades can be obtained when the lease runs out

Question 25

disadvatages

Answer 25

you never own the asset

Question 26

describe trade credit

Answer 26

when goods/materials can be bought from suppliers but are not paid for until the following month etc (buy now pay later)

Question 27

advantage trade credit

Answer 27

1. can buy goods and sell them on before payment is required.
2. provided payment is made within the agreed number of months then no interest is charged

Question 28

disadvantages trade credit

Answer 28

1. may lose out on prompt payment discounts

w. may gain a reputation as a slow payer

Question 29

describe factoring

Answer 29

when a business employs the service of a factor. The factor take on the responsibility of collecting the business debts and will pay an amount immediately.

Question 30

advantages factoring

Answer 30

1. allows the business to receive cash immediately

2. removes the inconvenience of chasing up late payments

Question 31

disadvantages factoring

Answer 31

the service of factor has to be paid for. The full values of the debts are never received

Question 32

describe issue shares

Answer 32

this is when someone buys a share in the business (plc) or is invited to invest in the business (ltd). teh shareholders may recieve dividends when profits are made

Question 33

advantages issue shares

Answer 33

large amounts of money can be raised quickly

Question 34

disadvantages issue shares

Answer 34

dividends have to be paid to sharegolders which reduces the retained profits of the business.