Sources of Finance (Private Sector)

Question 1

What is Owner’s Equity (Sole Trader and Partnership only)?

Answer 1

This refers to money invested by the owner/partner into the business.

Question 2

What are the advantages of Owner’s Equity?

Answer 2

The money does not have to be repaid.
No interest has to be paid.

Question 3

What is a disadvantage of Owner’s Equity?

Answer 3

There may be insufficient money to fund the business.

Question 4

What is a Bank Loan?

Answer 4

This refers to a sum on money lent from the bank which has to be repaid with interest over an agreed number of years.

Question 5

What are the advantages of a Bank Loan?

Answer 5

The money can be obtained in one lump sum.
Repayments can be spread over several years so budgeting is easier.

Question 6

What are the disadvantages of a Bank Loan?

Answer 6

Interest has to be paid.
Small businesses may find it hard to obtain a bank loan and may have to pay higher rates of interest.

Question 7

What is a Grant?

Answer 7

This refers to a sum of money received from the Local Council, Government or Lottery for a specific purpose.

Question 8

What are the advantages of a Grant?

Answer 8

The money doe not have to be repaid.
A large amount of money can be received at one time.

Question 9

What are the disadvantages of a Grant?

Answer 9

There will be certain restrictions as to what the money can be used for.
Time consuming and complex application process.

Question 10

What are Re-Invested Profits?

Answer 10

This refers to profit left over at the ned of the year that has not been shared with owner(s).

Question 11

What is a advantage of Re-Invested Profits?

Answer 11

There are no extra costs (eg interest to be paid).

Question 12

What is a disadvantages of Re-Invested Profits?

Answer 12

There may be insufficient money to fund the business.

Question 13

What is a Mortgage?

Answer 13

This is a loan specifically for the purchase of property.

Question 14

What is a advantage of a Mortgage?

Answer 14

Amount can be repaid over a long period of time (eg 25 years).

Question 15

What are the disadvantages of a Mortgage?

Answer 15

Interest has to be paid.
If repayments are not made then the property may be repossessed.

Question 16

What is Leasing?

Answer 16

This is paying a monthly fee for the use of equipment/vehicles (assets).

Question 17

What are the advantages of Leasing?

Answer 17

Can obtain the asset without a large financial outlay.
Repairs are carried out by the leasing company as part of the agreement.

Question 18

What is Hire Purchase?

Answer 18

Buying an assets and paying it back over several months (eg 48 or 60 months). An initial down payment is normally required.

Question 19

What are the advantages of Hire Purchase?

Answer 19

Allows businesses to buy assets without needing the full amount up front.
Once full payments have been made the asset is owned.

Question 20

What are the disadvantages of Hire Purchase?

Answer 20

The asset is not fully owned until the last payment is made.
The total paid is more than the value of the asset dur to interest charges.

Question 21

What is Bank Overdraft?

Answer 21

Withdrawing more money from your bank account than you have available.

Question 22

What are the advantages of a Bank Overdraft?

Answer 22

Useful as a short-term source of finance to overcome cash flow problems.
You are not tied into an agreement which required repayment over several years.

Question 23

What are the disadvantages of a Bank Overdraft?

Answer 23

An expensive form of borrowing with high interest charges.
Additional costs incurred if not pre-arranged with the bank.

Question 24

What is a Trade Credit?

Answer 24

When goods/materials can be bought from suppliers but are not paid for until a later date (eg 30 days credit).

Question 25

What are the advantages of a Trade Credit?

Answer 25

Can buy goods and sell them on before payment is required.
Provided payments is made within the agreed number of months then no interest is charged.

Question 26

What are the disadvantages of a Trade Credit?

Answer 26

May lose out on prompt payment discounts.
May gain a reputation as a slow payer.

Question 27

What are Issuing Shares?

Answer 27

Selling shares to friend and family in return for part ownership of the company.

Question 28

What is an advantages of Issuing Shares?

Answer 28

Large amounts of additional finance can be raised.

Question 29

What are the disadvantages of Issuing Shares?

Answer 29

Dividend have to be paid which reduces the retained profit for the company.
New shareholders will have a say in how the business is run (ownership is diluted).