SOURCES OF FINANCE COMPONENT 1

Question 1

what is sources of finance

Answer 1

sources of finance is the different ways a business can obtain money to fund its operations, growth, or other activities

Question 2

what is internal sources of finance

Answer 2

Money that is generated from within the business or from the business owners own capital

Question 3

what is external sources of finance

Answer 3

Money that is raised from
sources outside of the business.

Question 4

what are examples of internal sources of finance

Answer 4

• retained profit
• working capital
• sale of assets

Question 5

what are the advantages and disadvantages of retained profit

Answer 5

ADVANTAGES
- cheapest form of finance
- available immediately

DISADVANTAGES
- money is tied up in business
- loss of profit to owners
- short term pressures can prevent this sources of finance

Question 6

advantages of sale of assets

Answer 6

ADVANTAGES
- established businesses can do this
- gain profit

DISADVANTAGES
-smaller business’s cannot
- if growth is an objective then they would want to acquire them

Question 7

examples of external sources of finance

Answer 7

• bank loan
• debt factoring
• overdraft

Question 8

positives and negatives of debt factoring

Answer 8

ADVANTAGES
- provides immediate cash instead of having to wait for customer
- factoring company takes on the risk
- saves time for business from collecting debts

DISADVANTAGES
- expensive, debt company charges a fee
- customer relations, customer may not feel comfortable dealing with 3rd party
- only a portion of overall payment comes to business (usually 85%)

Question 9

advantages and disadvantages of overdraft

Answer 9

ADVANTAGES
- quick access to cash, helpful for day to day expenses

DISADVANTAGES
- high interest can be charged
- may be an arranged fee
- loan may be recalled instantly

Question 10

what determines how suitable a source of finance is

Answer 10

• how much funding is needed
• what finance will be used for
• how long the money is required