Unit 3.1 Introduction to finance and sources of finance

Question 1

What is Internal Finance?

Answer 1

Money raised from the business’s own assets or from profits left in the business (retained profits).

Question 2

What is External Finance?

Answer 2

Money raised from sources outside the business (e.g. share issue, leasing, bank loan).

Question 3

What is Retained Profit?

Answer 3

The profit left, after all deductions, including dividends, have been made. This is ‘ploughed back’ into the company as a source of finance.

Question 4

What is an Overdraft?

Answer 4

Bank allows a business borrowing up to an agreed limit as and when required.

Question 5

What is Debt-Factoring?

Answer 5

Selling of claims over debtors to a debt factor in exchange for immediate liquidity.

Question 6

What is Hire Purchase?

Answer 6

Assets sold to companies that agree to pay fixed repayments.

Question 7

What is Leasing?

Answer 7

Renting a product.

Question 8

What is Venture Capital?

Answer 8

High risk capital invested in start-up businesses with good profit potential. Are not easy to obtain finance from other sources.

Question 9

What are Business Angels?

Answer 9

Individuals who invest personal capital in a variety of businesses.

Question 10

What are Subsidies?

Answer 10

Financial support from the government used to lower operating costs.

Question 11

What is an Initial Public Offering?

Answer 11

Business converting its legal status to a PLC by selling its shares on the stock exchange.

Question 12

What is Loan Capital?

Answer 12

Refers to medium to long-term sources of interest-bearing finance obtained from commercial lenders. Examples include mortgages, business development loans, and debentures.

Question 13

What is Revenue Expenditure?

Answer 13

Refers to spending on the day-to-day running of a business, such as rent, wages, and utility bills.

Question 14

What is Sale-and-Leaseback?

Answer 14

External finance: business sells a fixed asset but immediately leases it back.

Question 15

What is Share Capital?

Answer 15

Money raised from selling shares in a PLC.

Question 16

What is a Share Issue?

Answer 16

When a PLC raises finance by selling shares.

Question 17

What are Sources of Finance?

Answer 17

The general term used to refer to where or how businesses obtain their funds, such as from personal funds, retained profits, loans, and government grants.

Question 18

What is Trade Credit?

Answer 18

Allows a business to ‘buy now and pay later’. The credit provider does not receive any cash from the buyer until a later date (usually allowed between 30-60 days).

Question 19

What is Capital Expenditure?

Answer 19

Investment spending on fixed assets such as the purchase of land and buildings.

Question 20

What are Grants?

Answer 20

Government financial gifts to support business activities. They are not expected to be repaid by the recipient.

Question 21

What are the benefits of Retained Profit?

Answer 21

• Cheap
• Permanent source of finance
• Flexible, can be used in a way the business deems fit
• Owners have control of their retained profit.

Question 22

What are the limitations of Retained Profit?

Answer 22

• Startup businesses will not have any retained profit.
• If retained profit is too low, it may not be sufficient for growth.
• Owners may overuse retained profit.
• A high retained profit may mean that either little or nothing was paid out to shareholders as dividends.

Question 23

What influences the choice of sources of finance?

Answer 23

Purpose or use of funds, cost, status and size, flexibility, state of external environment, gearing.