Sources Of Finance

Question 1

What are two types of finance?

Answer 1

Sources of finance can be INTERNAL or EXTERNAL.

Question 2

What are internal finances?

Answer 2

Are from the business

Question 3

What is owners funds?

Answer 3

This is money that is put into the business from the private savings of the owners. Many businesses are started using the owners’ own savings, an inheritance or redundancy pay.

Question 4

What is retained profits?

Answer 4

When businesses make profits, the owners can decide to use some or all of them to expand and improve the business.

Question 5

What is selling assets?

Answer 5

Some businesses will have possessions that they no longer need. These can be sold off to raise money. Such assets may include machinery, land, vehicles or part of business.

Question 6

What is short term external finance?

Answer 6

These are from outside the business and have to be repaid within one year.

Question 7

What is bank overdraft?

Answer 7

The business is allowed to have a negative bank account when it does not have enough money to pay its costs. There is usually a limit on the amount of the overdraft.

Question 8

Advantages of bank overdraft?

Answer 8

Flexible – the business borrows what it needs

Unlike loans, interest is only paid on the amount borrowed.

Question 9

Disadvantages of bank overdraft?

Answer 9

Interest charged is an additional fixed cost.

The bank can end the agreement at any time.

Question 10

What is trade credit?

Answer 10

This means not immediately paying suppliers for stock.

Question 11

Advantages of trade credit?

Answer 11

No interest is paid

Helps cash flow if no overdraft is available

Question 12

Disadvantages of trade credit?

Answer 12

May miss out on discounts

May not be available to new businesses.

Question 13

What does leasing mean?

Answer 13

means that you rent the asset and never own it.

Question 14

Advantages of leasing?

Answer 14

Cheaper in the short run than buying it

Asset can be regularly updated

Question 15

Disadvantages of leasing?

Answer 15

More expensive in the long run than buying

Question 16

What is long term external sources?

Answer 16

These are from outside the business and will take more than a year to repay.
In some cases (share capital or Government grants), they will not have to be repaid at all.

Question 17

What is a bank loan?

Answer 17

The business will borrow a lump sum of money that must be repaid, with interest, over a number of years; usually in monthly instalments.

Question 18

Advantages of bank loans?

Answer 18

No loss of ownership (unlike shares)
Repayments are only for a fixed period of time (unlike dividends to shareholders)
Monthly repayments are better for cash flow than paying a lump sum for a fixed asset

Question 19

Disadvantages of bank loans?

Answer 19

Interest is an additional fixed cost

Monthly repayments are still an additional outflow that can damage cash flow

Security may be needed

Question 20

What is hire purchase?

Answer 20

The business buys an asset (e.g. a car) and pay for it in monthly instalments.
It does not own the asset until it makes the last payment.

Question 21

Advantages of hire purchase?

Answer 21

Can be used if a bank loan isn’t available
No loss of ownership (unlike shares)
No security is needed (unlike bank loans)

Question 22

Disadvantages of hire purchase

Answer 22

Often a higher rate of interest than banks

Monthly repayments are an additional outflow

Asset may be taken if repayments aren’t met

Question 23

What is share issues?

Answer 23

Money paid by shareholders to become owners of a limited company.