Sources Of Finance

Question 1

Describe some factors which may affect source of finance.

Answer 1

How much money is needed.
Lengths of time the money is needed for.
Purpose of finance.
Current performance and cash position of business.
Type of business ownership.
Bank interest rates (determined by Bank of England base rate).

Question 2

What’s a bank loan?

Answer 2

A lump sum borrowed by the bank and paid back over an agreed period of time and paid with interest. Often secured by asset.

Question 3

Discuss bank loan.

Answer 3

Advantages:

A fixed payment so easy to budget (certainty).
Able to negotiate term so that payments are affordable.

Disadvantages:

Repay more than borrowed.
Secured by an asset, which could be seines if payments are not paid.
Changes in external factors can cause the loan to be expensive.

Question 4

What’s a government grant?

Answer 4

A capital gained from the government when a set of criteria are met which doesn’t need to be repaid.

Question 5

Discuss a government grant.

Answer 5

Advantages:

No interest
No repayments

Disadvantages:

Conditions to meet limited funds.
Takes a long time to arrange.

Question 6

What’s a mortgage?

Answer 6

A long term loan used to purchase land or property.

Question 7

Discuss mortgage.

Answer 7

Advantages:

Long term to repay which makes it affordable.
Cheapest method of bank borrowing.

Disadvantages:

Variable rate of interest making payments rise.
Bank can size property if payments are not made.

Question 8

What’s a debenture?

Answer 8

A long term, high value loan with a fixed rate of interests, only available to plc’s.

Question 9

Discuss debenture.

Answer 9

Advantage:

Long time to repay which makes it affordable.
Fixed interest rate.

Disadvantages:

Huge lump sum at the end of the year,

Question 10

What’s a trade credit?

Answer 10

An agreement with the supplier to buy stock and pay for it after an agreed credit period.

Question 11

Discuss trade credit.

Answer 11

Advantages:

Gives time to sell goods and earn money which is good for cash flow.

Disadvantages:

Risk of bad debt if stock doesn’t sell.

Question 12

What’s debt factoring?

Answer 12

An agreement with a factoring company to sell unpaid debts.

Question 13

Discuss debt factoring.

Answer 13

Advantages:

Business gets 80% of debt upfront.
Business doesn’t have to chase customers for payments.

Disadvantages:

Business loses 5% of fee to factoring company which cuts income.
Relationship with customer will suffer.

Question 14

What’s an overdraft?

Answer 14

An agreement with the bank to overspend the business bank account to an agreed limit.

Question 15

Discuss overdraft.

Answer 15

Advantages:

Arranged in advance which makes it available immediately.
Avoids making late payments.

Disadvantages:

Expensive methods of bank borrowing ( high interest rate).
Suitable for only short term borrowing.

Question 16

What’s share capital/share issue?

Answer 16

Selling part ownership in return for some cash investment. Does not need to be repaid but shareholders expect a dividend, to be paid out of profits.

Question 17

Discuss share issue/share capital.

Answer 17

Advantages:

No repayments, no legal obligation to lay dividend.
Significant potential investment into the business.

Disadvantages:

Giving up part ownership.
Lose control of part profits (dividend)
Long time to arrange.

Question 18

What’s retained profits?

Answer 18

Profits made from previous year which has not been spent.

Question 19

Discuss retained profits.

Answer 19

Advantages:

No interest.
No repayments
No loss of ownership

Disadvantages:

Could be risky to invest all of saved funds.
May be limited/ unavailable

Question 20

What’s a venture capital?

Answer 20

Investment into business by a venture capitalism (firm or individual) for share ownership.

Question 21

Discuss venture capital

Answer 21

Advantages:

No repayments
Available for high risk ventures

Disadvantages:

Loss of part ownership
Loss of control in decisions.

Question 22

What’s hire purchase?

Answer 22

An asset is purchase with a deposit, then the balance is paid with interest over an agreed period of time.

Question 23

Discuss hire purchase.

Answer 23

Advantages:

Avoids lump sum outlay.
Time to lay for it in instalments.

Disadvantages:

Interest added so overall cost is higher.
Assets can be seines if payments are not made.

Question 24

What’s sales of assets?

Answer 24

A lump sum gained when the business sells an asset or groups of assets that the business no longer requires.

Question 25

Discuss sales of assets.

Answer 25

Advantages:

No interest.
No repayments.
No ownership of the Business.

Disadvantages:

No longer have the use of the asset.
May take a long time to find a buyer.

Question 26

What’s leasing?

Answer 26

An agreement with a leasing company to pay monthly for the use of an asset, usually 3 years.

Question 27

Discuss leasing.

Answer 27

Advantages:

Leasing company does the repairs.
Replace assets after 3 years.

Disadvantages:

Interest added.
Always have payments.

Question 28

What’s sales and leaseback?

Answer 28

The business sells an asset to a leasing company then hearses it back for use in the business.

Question 29

Discuss sales and leaseback.

Answer 29

Advantages:

Big cash injection
Keep use of assets.

Disadvantages:

Increases costs
Interest added.