Sources of Finance

Question 1

Debt factoring

Answer 1

-sells its debts to a factor for less than face value
The factor chases up the unpaid debt saving time and money
But..
Factors tend to be interests in only large outstanding debts and they can earn more profit and the business doesn’t receive the full amount of outstanding debt

Question 2

Leasing

Answer 2

-rent instead of buy
Equipment can be changed on a regular basis so will be up-to-date
But..
Leasing can be expensive and equipment is not owned by the business

Question 3

Retained profit

Answer 3

-profits from previous years reinvested
Doesn’t involved lying any interest to another business
But..
May find it difficult to get enough finance just using retained profits

Question 4

Hire purchase

Answer 4

-paying for them Over a number of years in instalments
Cost of purchase is spread over a period of time
But..
High rates of interest so expensive

Question 5

Crowdfunding

Answer 5

-people invest in projects for a potential profit or reward
Fast way to raise funding and pitching a product online is a form of marketing and can lead to media attention
But..
If you don’t reach your target the funds pledged should be returned so you received nothing and failed projects risk damage to the business reputation

Question 6

Bank loan

Answer 6

-lenses a certain amount for a specific purpose for a specified period of time and agreed repayments each month
Helps to plan and loan repayment is spread over a number of years
But..
Interest has to be paid on the loan

Question 7

Government grant

Answer 7

-money you don’t need to get back
Grant doesn’t need to be repaid and it’s given in a lump sum
But..
usually only given once, might not be a large amount and it could be tied to a specific project that the business may undertake

Question 8

Debentures

Answer 8

-plcs can borrow by selling debentures which are long terms ious and debenture holders receive interest annually and the firm must repay the loan at the end of specified time
Large amounts of equity can be raised and the company only has to pay interest
But..
If the business fails to make interest payments the firm can seize the business assets and interest must be paid even if the business makes a loss

Question 9

Share issue

Answer 9

-issue more shares to raise funds
Large amounts can be raised and shareholders benefit from limited liability
But..
Admin costs are high and must be paid upfront and selling price is subject to demand so can fall

Question 10

Venture capital

Answer 10

-loans that are considered risky and they acquire a share on the business
Good for businesses with risky credit rating and large amounts of finance can be raised
But..
Not suitable for short term financial requirements and part-ownership could be requested

Question 11

Sale and leaseback

Answer 11

-sells and leases them back
Can generate large amounts of capital and business is no longer responsible for repairs
But..
Business assets are reduced which makes it diffcult to secure future finance and renting can turn out more expensive that purchasing

Question 12

Mortgage

Answer 12

-borrowing to buy premises with long term repayments
Repayment is a long period of time and fixed interest rates can be arranged
But..
Failure to make repayments could result in property being repossessed and a lot of interest is paid back

Question 13

What to consider when selecting a source

Answer 13

Interest rate
-lower the better
Payment plan
-length of loan and total interest to be paid back
Cost of borrowing
-is a down payment required or what’s the total to be paid back
Credit rating
-the better a business is paying back debt then the better deals the will get when borrowing money