types of finance

Question 1

what is retained profit? is it short term or long term?

Answer 1

retained profit is profits kept by the business to then be later on reinvested back into the business

Question 2

retained profits: advantage and disadvantage

Answer 2

(+) no interest, and don’t have to pay back

(-) shareholders may want that money back as a dividend

Question 3

what is sales of assets- short or long term and why?

Answer 3

when a business sells assets they currently have, for example a delivery van - short term because you can only sell it once

Question 4

sale of assets: adv and disadv

Answer 4

(+) creates value/ a use for idle resources

(-) the business loses the use of that asset (e.g. no longer have a delivery van)

Question 5

what is owners owners capital? - short term or long term

Answer 5

personal savings of a business owner that is invested in the business

Question 6

owners capital- adv and disadv

Answer 6

(+) no interest needed!
(-) owners could make a loss rather than a gain

Question 7

what is crowdfunding- short term or long term?

Answer 7

when a business wants to get a project off the ground so they ask people to invest into their business- short term

Question 8

crowd funding- adv and disadv

Answer 8

(+) cheap and easy to set up

(-) hard to raise large amounts of money with it

Question 9

what is a bank loan- short term or long term?

Answer 9

a bank loan is money the bank loans you and you have to pay it back- can be both short term or long term, depending on the loan

Question 10

bank loan- adv and disadv

Answer 10

(+) an negotiate how much you want from the bank

(-) includes interest and you have to pay it back

Question 11

what is share capital- short or long term?

Answer 11

the money a company raises when they sell shares to investors- long term

Question 12

share capital- adv and disadv

Answer 12

(+) can get large amounts of capital with no interest

(-) only available for Ltd (people you know) and Plc (the public)

Question 13

what is trade credit- short or long term?

Answer 13

when a business can’t pay their supplier upfront, so they ask for an extension/deadline to pay the money back by- short term

Question 14

trade credit- adv and disadv

Answer 14

(+) good when buying raw materials from suppliers, because you can then make the revenue then pay the supplier back

(-) delays in payments can affect relationships with the supplier

Question 15

what is venture capital- is it short term or long term?

Answer 15

venture capital is when an investor invests into your business and demands a percentage of your business in exchange (e.g dragons den!)

Question 16

venture capital- adv or disadv

Answer 16

(+) you can gain expertise from the investor

(-) have to give away a percentage of your earnings

Question 17

what is peer to peer lending?

Answer 17

the lending of money to individuals which avoids the bank

Question 18

adv and disadv of peer to peer lending

Answer 18

(+) interest rates are better than the bank and can be easily completed online
(-) if you are a lender, access to cash may not be instant

Question 19

what is a business angel?

Answer 19

individuals who invest in exchange for a stake in a business

Question 20

what is unlimited liability?

Answer 20

where everything is carried out in the name of the owners, and there is no legal difference between the owner and the business

Question 21

2 implications of unlimited liability

Answer 21

• if their business fails, the owners have to meet the debts of the business with their personal resources like their house
• the owner is also financially liable if the company is sued

Question 22

2 implications of limited liability

Answer 22

(+) the owners are shareholders, their financial liability is limited to the amount of money invested into the business, so if a company collapses, the owners’ private assets are protected

(-) in some cases, the owner will have to give personal guarantees of the company’s debts to those lending to the company, so they will have to pay off the debts if the company can’t

Question 23

what is limited liability?

Answer 23

when the business has a separate legal identity from its owners

Question 24

what 4 types of finance is appropriate for unlimited liability businesses?

Answer 24

• retained profit
• crowd funding
• bank overdraft
• grants (lengthy application process and need to qualify)

Question 25

what 3 types of finance is appropriate for limited liability businesses

Answer 25

• share capital
• venture capitalists
• business angels