Unit 19 Flashcards
Q1. What is sale and leaseback?
A1. Business sells non-current assets and leases it back from the new owner.
Q2. What are government grants?
A2. Funds and financial support provided by governments to businesses to encourage business activities.
Q4. What is working capital?
A4. Capital needed to finance day-to-day running expenses.
Q3. What is start-up capital?
A3. Capital needed by an entrepreneur when first starting a business.
Q5. What is a non-current (fixed) asset?
A5. Resources owned by a business which will be used for a period longer than a year.
Q6. What is capital expenditure?
A6. Spending by a business on non-current assets such as machinery and buildings.
Q7. What is long-term finance?
A7. Debt or equity used to finance the purchase of non-current assets or expansion plans for more than one year.
Q8. What is short-term finance?
A8. Loans or debt a business expects to pay back within a year.
Q9. What is retained profit?
A9. Profit remaining after all expenses.
Q10. What is an overdraft?
A10. An agreement with the bank that allows a business to spend more money than it has in the bank, which needs to be paid back.
Q11. What are internal sources of finance?
A11. Capital that can be raised from within the business itself.
Q13. What is equity finance?
A13. Permanent finance provided by owners of a limited company.
Q12. What is a share issue?
A12. Source of permanent capital available to limited liability companies.
Q14. What is micro-finance?
A14. Small amounts of capital loaned to entrepreneurs for small periods of time.
Q15. What is crowd funding?
A15. Financing a business idea by obtaining small amounts of capital from large numbers of people.
Q16. What are trade receivables?
A16. Amounts owed to a business by its customers who bought goods on credit.
What is Debt factoring?
A17. Selling trade receivables to increase liquidity.
Q19. What is leasing?
A19. Obtaining permission to use a non-current asset by paying a fixed amount over time.
Q18. What is a bank loan?
A18. Provision of finance by a bank which the business will repay with interest.
Q20. What is hire purchase?
A20. Purchase of an asset by paying a fixed repayment amount over a period of time.
Q21. What is a mortgage?
A21. A long-term loan used for the purchase of lands or buildings.
Q22. What are debentures?
A22. Bonds issued by a company to raise long-term finance.
Q23. What are external sources of finance?
A23. Capital raised from outside the business.
Q.24 What are the reasons behind a business to need finance?
A.24
1) To set up business.
2) Pay day-to-day expenses.
3) Purchase non-current assets.
4) Invest in latest technology.
5) Expanding the business.
6) Research into new products and markets.
Q.25 What are some internal sources of finance?
A.25
1) Retained profit.
2) Sale of non-current assets.
3) Use of working capital.
Q.26 What is the benefit of using retained profit?
A.26 No extra cost to the business as this funds are coming from business activities.
Q.27 What is the limitation of using retained profit?
A.27 Only available when the business is profitable.
Q.28 How does sale of non-current asset help as a source of internal funding?
A.28 This is done by selling unwanted non-current assets or selling leaseback of non-current assets.
Q.29 How does retained profit help as an internal source of finance?
A.29 Reinvesting some profits instead of giving it to shareholders.
Q.30 What are the benefits of sale and leaseback as a source of internal funding?
A.30
1) No direct cost.
2) Profit from unwanted land and buildings.
3) Often raises high amount of money.
Q.31 What are the limitations of using sale and leaseback as a source of internal funding?
A.31
1) May be difficult to sell.
2) Need to pay annual leasing charges.
3) When leasing agreement comes to an end, business needs to find new premises.
Q.32 What are the sources of internal funding from working capital?
A.32
1) Cash balances.
2) Reducing inventory levels.
3) Reducing trade receivables.
Q.33 Explain how this helps internal funding as working capital: cash balances.
A.33 Used to pay day to day expenses, short term debts, and unexpected expenditures.
Q.34 Explain how this helps internal funding as working capital: Reducing inventory levels.
A.34 Reducing the quantity of raw materials and finished products can lead to less expenses by the businesses in terms of storage.
Q.35 Explain how this helps internal funding as working capital: Reducing trade receivables.
A.35 Offering customers discounts on trade receivables to encourage customers to pay for trade receivables faster.
Q.36 What is the advantages of debt financing?
A.36 Does not change company ownership.
Q.37 What is the disadvantage of debt financing?
A.37 Increases business cost.
Q.38 What is the advantage of equity financing?
A.38 Does not have to be repaid.
Q.39 What is the disadvantage of equity financing?
A.39 Dilutes ownership of company.
Q.40 What are the factors influencing the choice of finance/
A.40
1) Size of business.
2) Amount required.
3) Length of time.
4) Existing borrowing.
Q.42 How does this affect choice of finance: Amount required.
A.42 Large capital amounts require debentures, small amounts can be gotten from banks.
Q.41 How does this affect choice of finance: size of business.
A.41 Smaller businesses find it harder to borrow from banks or lenders.
Q.43 How does this affect choice of finance: Length of time.
A.43 Long-term finance can be acquired through shares issues, but for short-term, overdraft is better.
Q.44 How does this affect choice of finance: Existing borrowing.
A.44 Business with existing borrowing may find it difficult to borrow further from banks and lenders.
Q.45 Why do unincorporated businesses find it difficult to raise finance easily?
A.45
1) Cannot raise capital through sale of assets.
2) Only small projects are financed.
3) Often considered by lenders to be of high risk.
Q.47 Explain how short term finances can be collected with overdrafts.
A.47 Withdrawal of a sum of money that is greater than what the business has at hand from the bank.
Q.46 What are the short term sources of external finance?
A.46
1) Overdrafts.
2) Trade receivables.
3) Delaying payment.
4) Debt factoring.
Q.48 Explain how short term finances can be collected with trade receivables.
A.48 Supplier lending money for the cost of goods at an agreed period.
Q.49 Explain how short term finances can be collected with debt factoring.
A.49 Selling trade receivables to another company for a discounted amount to provide the business with immediate cash.
Q.50 What are the limitations of delaying payment in order to get short term external finances?
A.50
1) Discount offered from supplier may be lost.
2) Supplier may refuse to make further purchases.
3) If delayed payment occurs, supplier may want payment before delivery.
Q.51 What are long term sources of external finance?
A.51
1) Bank loan.
2) Leasing.
3) Hire purchase.
4) Mortgage.
5) Debenture.
6) Issuing shares.
Q.52 Explain how business gets long term external finance from a bank loan.
A.52 Amount borrowed is offered with fixed or variable rate of interest. This cannot be done by small businesses due to being seen as high risk by banks.
Q.53 Explain how business gets long term external finance from leasing.
A.53 Business pays fixed amount over a set period of time and returned to original owner at the end of lease term.
Q.54 Explain how business gets long term external finance from hire purchase.
A.54 Business will own the asset after all payments spread over time have been made and is responsible for maintenance while being used.
Q.55 Explain how business gets long term external finance from Mortgage.
A.55 Used mainly for land of buildings. Interest is charged on amount borrowed.
Q.56 Explain how business gets long term external finance from debenture.
A.56 Type of bond the business sells in order to raise large sums of money.
Q.57 Explain how business gets long term external finance from issuing shares.
A.57 Capital is raised from the selling of shares and does not have to be repaid unless the business stops trading.
Q.58 What are the alternate sources of capital?
A.58
1) Micro-finance.
2) Crowd-funding.
Q.59 How does micro-finance help as a source of capital?
A.59 Small loans paid within 6 months or a year.
Q.60 How does crowd funding help with capital?
A.60 Idea for a project published on the internet or social media along with details about amount of finance needed.
Explain how delaying payment works as an external source of finance.
Delaying payment will allow a business to have more liquidated funds for longer time.
Explain how overdrafts help as a short term source of external finance.
Withdrawal of a sum of money that is greater than what the business has at hand from the bank.
Explain how debentures help as a source of long term finance?
Type of bond the business sells in order to raise large sums of money.
What are the things a business can do with unwanted non-current assets to raise finances?
(1) Sales of unwanted assets.
(2) Sale and leaseback.
