Unit 5-Sources Of Finance

Question 1

Debt factoring pros cons (2,2)

Answer 1

Selling debts owed to a third party in return for instant funds but at a reduced rate

+fund immediately (CF improves)
+reduced risk of bad debt (people can’t pay back)

• reduced rate
• reputation

Question 2

Overdrafts pros cons (2,3)

Answer 2

Allows firm to overspend on current account, with interest charged on amount overspent

+flexible-only borrow when required unlike loan
+quick/easy

• interest-can be variable
• bank can call it in at any time
• secured collateral with business’ assets

Question 3

Retained profit pros cons (2,3)

Answer 3

+no interest
+retain ownership

• only if profit exists
• shareholder dissatisfaction (less dividends)
• reduced security blanket

Question 4

Share capital (3,3)

Answer 4

+easy to raise large finance
+dividends only paid if profiting
+no interest

• dilution
• risk of takeover
• admin costs of processing/issuing shares

Question 5

Bank loans (3,3)

Answer 5

+quick easy to secure
+fixed interest allows firms to budget accurately unlike overdraft
+retain ownership

• interest paid regardless of whether profitting or not
• high geared seen as high risk
• collateral
• often most expensive
• hard to secure if they dont think theyll get money back

Question 6

Venture capital pros cons

Answer 6

Investors invest in companies with high risk but high potential e.g dragons den

+Potential for large sums of finance
+Expertise
+Makes it easier to attract other investment (looks better)

• long and complex +legal fees
• loss of ownership can be significant (they want large stake)
• conflict