Theme 2 Topic 7 - Internal & External Finance

Question 1

Define Internal Finance

Answer 1

Finance raised from within the business itself

Question 2

What are the three forms of internal finance?

Answer 2

Owner’s capital, Retained profits, Sale of assets

Question 3

Define Owner’s Capital

Answer 3

Money that is provided by the owner of the business from their own savings or personal wealth

Question 4

What are two advantages of owner’s capital?

Answer 4

Cheap source of finance as don’t have to pay interest on it, Allows owners to keep full control

Question 5

What are two disadvantages of owner’s capital?

Answer 5

Not sustainable, Won’t get it back if the business fails

Question 6

Define Retained Profits

Answer 6

Profit that is reinvested into the business rather than distributed to the shareholders or owners

Question 7

What are two advantages of retained profits?

Answer 7

Don’t have to pay interest, More in control

Question 8

What are two disadvantages of retained profits?

Answer 8

Low dividends may dissatisfy the shareholders, Not suitable for a start up business

Question 9

Define Sale of Assets

Answer 9

An asset is any item owned by the business

Question 10

What are two advantages of sales of assets?

Answer 10

The asset may no longer be needed so is a good source of finance, Don’t have to pay interest

Question 11

What are two disadvantages of sales of assets?

Answer 11

No longer able to use it if they need it in the future, May not get enough to cover the costs

Question 12

Define External Finance

Answer 12

Finance raised from sources outside the business

Question 13

What are the eleven external sources of finance?

Answer 13

Overdraft, Loan, Grant, Family and friends, Share capital, Venture capital, Trade credit, Leasing, Crowd funding, Other businesses, Peer-to-peer funding

Question 14

Define Overdraft

Answer 14

An arrangement that allows you to spend more money than you have in your bank account, up to a certain limit

Question 15

What are two advantages of overdrafts?

Answer 15

Extremely flexible, Interest is only paid on the amount of the overdraft being used rather than the maximum level allowed

Question 16

What are two disadvantages of overdrafts?

Answer 16

Higher interest rates than loans, The bank can ask for repayment at any time

Question 17

Define Bank Loan

Answer 17

Agreement to borrow a fixed sum of money over an agreed time period

Question 18

What are two advantages of loans?

Answer 18

Able to borrow a large amount of money, Able to pay back over time e.g. monthly

Question 19

What are two disadvantages of loans?

Answer 19

Have to provide security in the form of collateral, Have to pay interest for full time even if don’t use the full amount

Question 20

Define Government Grant?

Answer 20

A sum of money given to a business for a specific purpose

Question 21

What is an advantage of a grant?

Answer 21

As long as you fulfil the necessary condition, you don’t have to repay the grant

Question 22

What are two disadvantages of grants?

Answer 22

Must fulfil the condition to get the grant e.g. create jobs, Small amount of money

Question 23

Define Family and Friends

Answer 23

Can provide share capital or can lend money

Question 24

What are two advantages of using family and friends?

Answer 24

No interest paid, Able to pay back whenever

Question 25

What are two disadvantages of using family and friends?

Answer 25

Lose the money of the business fails, Might expect a share of the profits

Question 26

Define Share Capital

Answer 26

Money is given to a business by a shareholder in return for a share certificate which gives them part ownership of the company

Question 27

What are two advantages of share capital?

Answer 27

May get more help/shareholders think of new ideas, If business fails don't have to pay debt - only lose what they invested

Question 28

What are two disadvantages of share capital?

Answer 28

Lose control of the business, Have to pay shareholders dividends so don't get full profit

Question 29

Define Venture Capital

Answer 29

Finance provided to small firms which seek growth, but may be considered too risky by typical share buyers or other lenders

Question 30

What are two advantages of venture capital?

Answer 30

Business angels provide experience, Provides enough money to cover start-up costs (more than banks would)

Question 31

What are two disadvantages of venture capital?

Answer 31

May try to take over the business/take control over decisions, Have to do what finance providers want as they put money into the business

Question 32

Define Trade Credit

Answer 32

When a business obtains goods or services from another business but does not pay for these immediately

Question 33

What is an advantage of trade credit?

Answer 33

Able to sell products before needing to pay for them

Question 34

What are two disadvantages of trade credit?

Answer 34

Need good relationship/trust with supplier, May not sell the products

Question 35

Define Leasing

Answer 35

Agreeing to pay a fixed monthly rental for a fixed period instead of buying an asset

Question 36

What is two advantages of leasing?

Answer 36

Maintenance and bills are included in the lease, After fixed period can give it back if it is not needed anymore

Question 37

What is a disadvantage of leasing?

Answer 37

Paying a monthly fixed amount - could struggle to afford it

Question 38

Define Crowd Funding

Answer 38

Involves lots of small investors putting money into a new business via the internet often in return for a sample product or service

Question 39

What are two advantages of crowd funding?

Answer 39

Can raise finance relatively quickly often without upfront fees, It can raise awareness for a new business

Question 40

What are two disadvantages of crowd funding?

Answer 40

The idea could be copied if it isn't protected with a patent or copyright, Any money raised will normally be returned to investors or contributors if funding target isn't met

Question 41

Define Other Businesses (in terms of raising finance)

Answer 41

Some companies allocate some of their capital to early-stage developments

Question 42

Define Peer-to-Peer Funding

Answer 42

Opportunity for online matching platforms to match individuals who want to lend to individual business borrowers

Question 43

Define Unlimited Liability

Answer 43

When the finance of the business and the owner are seen as the same in the eyes of the law

Question 44

Define Limited Liability

Answer 44

The owners aren't personally responsible for the debts of the business, the most they can lose is the money they invested

Question 45

Define Business Plan

Answer 45

A written document that sets how the business will operate and what it hopes to achieve

Question 46

What does a business plan include?

Answer 46

Marketing, Production, Workforce, Financial Strategies

Question 47

What are two advantages of business plans?

Answer 47

Easier to communicate objectives/strategies | Forecast financial health

Question 48

What are two disadvantages of business plans?

Answer 48

Business could conceal weaknesses, Competitors could access confidential info/material