Topic 1.3.4 Sources of Finance Business Edexcel GCSE

Question 1

Short term sources of finance

Answer 1

sources of money for business that may have to be repaid either immediately or fairly quickly

Question 2

Long term sources of finance

Answer 2

sources of money for business that are borrowed or invested typically more than a year

Question 3

What are the advantages of trade credit?

Answer 3

The business will always have raw materials in stock, so they can continue manufacturing the product. The bank doesn’t need to approve (spontaneous finance) They won’t have to raise finance.

Question 4

What are the disadvantages of trade credit?

Answer 4

Some suppliers charge higher for a trade credit deal, and businesses may miss out on discounts.

Question 5

What are the advantages of an overdraft?

Answer 5

An overdraft is easy to obtain (doesn’t require security), it is a quick source of short-term finance. Very flexible

Question 6

What are the disadvantages of an overdraft?

Answer 6

High interest rates compared to loans, and you have to pay it back as soon as you receive cash in your account.

Question 7

What is credit limit?

Answer 7

A limit to the amount or worth of supplies you can buy which is decided by the business and suppliers.

Question 8

What is credit period and frequency?

Answer 8

Credit period- amount of time you have to pay the trade credit back in (e.g. 30 days)
Frequency- how often you have to pay it back (e.g. weekly)

Question 9

What are the advantages of a bank loan?

Answer 9

Bank loans are usually for large amounts and can be paid back over a long period of time (e.g. 2 years) They are paid in monthly installments to improve cash flow.

Question 10

What are the disadvantages of a bank loan?

Answer 10

They are hard to obtain, because it depends on the bank and how successful they think it will be and they have to do credit checks. They have high interest rates, and may demand security from assets.

Question 11

What are the advantages of crowdfunding and give an example?

Answer 11

Crowdfunding occurs when people donate a small amount of money towards your business. (e.g. Kickstarter) Useful for small businesses as an advert.

Question 12

What are the disadvantages of crowdfunding?

Answer 12

Alerts competitors about your product and your need for funds. Crowdfunding may not be successful, so it could be a waste of time.

Question 13

What are the advantages of retained profit?

Answer 13

No interest rates, and you don’t need to pay anything back. Easy to access and quick form of finance.

Question 14

What are the disadvantages of retained profit?

Answer 14

It depends on the size of the business, and can only be used for small purchases. Owner can’t spend it on himself.

Question 15

What are the advantages of venture capital?

Answer 15

Good for risky start-up businesses. Investors can give you advice along with large sums of money to help you run the business.

Question 16

What are the advantages of share capital?

Answer 16

Easy to access and quick source of finance. Business doesn’t need to pay interest.

Question 16

What are the disadvantages of venture capital?

Answer 16

Owners may lose control over the business, and investors expect some share of profits in return.

Question 17

What are the disadvantages of share capital?

Answer 17

Shareholders have a vote on changes in the business, so they may not like it.

Question 18

What is trade credit?

Answer 18

The practice of buying goods or services now and paying for them later.
A credit arrangement that is offered to a business by its suppliers

Question 19

What is venture capital:

Answer 19

It is money invested by outsiders, which helps businesses get started and develop new products. It helps entrepreneurs develop an idea in to a new product. It might be used to finish developing a marketable product, build or improve production facilities or to pay for product distribution.
Money that is invested in a business sourced from individuals or groups (Dragons Den)

Question 20

Define the term dividends

Answer 20

Payments made to shareholders from the company’s yearly profits. The directors of the company decide how large a dividends payment to make; in a bad year they can decide on zero

Question 21

What is share capital?

Answer 21

When shareholders invest money into the business.
Money to invest in a business which is made from selling shares in the business

Question 22

What is a credit check?

Answer 22

A check on the financial status of a business

Question 23

What is retained profit?

Answer 23

The profit kept in the company rather than paid out to shareholders as a dividend.
Money that a business keeps rather than paying to shareholders

Question 24

What is crowdfunding?

Answer 24

the practice of funding a project or venture by raising many small amounts of money from a large number of people, typically via the Internet.
A business obtains money from many people who each pay a small amount

Question 25

What is a loan?

Answer 25

A sum of money received from the bank which can be paid back, over time, with interest