Sources of Finance

Question 1

Why do Firms need Finance?

Answer 1

• New, need start-up capital
• New firms, finance poor initial cash flow, need to pay suppliers before moey comes in from customers
• Al l firms need day to day capital - working capital
• Cover shortfall in liquidity, when cust delay payment
• To fund expansion

Question 2

What are the 5 main sources of start-up finance?

Answer 2

• Grants
• Trade credit
• Overdrafts
• Loans
• Venture Capital

Question 3

What is a Grant

Answer 3

EU, Local gov & charities might give a grant that doesn’t need to be paid back. You have to qualify eg, area of high unemployment etc

Question 4

What is Trade Credit?

Answer 4

Rather than paying cash on delivery, firms will invoice a cust & give 30-60 days to pay, useful as gives you time to earn the money to pay the invoice.

Question 5

What is an overdraft?

Answer 5

Bank lets you take more money out than you have in the account, you pay a high interest while you are overdrawn

Question 6

What are the three types of loan?

Answer 6

• Bank - quick & easy to set-up, repaid with interest, bank may want collateral, assets the bank can reposes if loan not repaid (ie, house)
• Friends & family.
• Mortgage - long term loan, more than 5 years, used to buy a property. Property is used as collateral, low interest rates, sole trader might re-mortgage house to borrow money from the bank but this is risky as you could lose your house

Question 7

What is venture capital?

Answer 7

Money invested by individuals or businesses who specialise in financing new or expanding firms. In return they take a stake (%) ownership, eg dragons den!

Question 8

Why can it be hard for new firms to raise finance?

Answer 8

• Probably don’t make huge profits, so not much spare cash to fund new projects
• Makes banks & lenders reluctant to lend money as there’s a larger risk.