Unit 5.2 Sources of finance

Question 1

Why would a business need finance?

Answer 1

1) Establish a new business start-up, which means spending money on capital equipment, recruiting workers and marketing activities
2) Fund expansion when a business grows in size
3) Run business recruitment, paying for the recruitment costs
4) Develop marketing activities

Question 2

Why are not all sources of finance available to every business?

Answer 2

1) Sole traders and partnerships are not able to raise finance by selling shares
2) Limited companies cannot take extra partners in the hope of raising more finance
3) Businesses with a poor financial record are unlikely to find many banks willing to lend money to them

Question 3

What are internal sources of finance?

Answer 3

1) Owners capital
2) Sale of fixed assets
3) Retained profit

Question 4

What are external sources of finance?

Answer 4

1) Overdraft
2) Trade credit
3) Bank loan
4) Crowdfunding
5) Taking on a new partner
6) Share issue

Question 5

What is the type and availability of finance for owners capital?

Answer 5

Short, medium or long term, sole trader and partnerships

Question 6

What is the type and availability of finance for retained profit?

Answer 6

Medium or long term, all businesses

Question 7

What is the type and availability of finance for sale of assets?

Answer 7

Short, medium or long term, all businesses

Question 8

What is the type and availability of finance for overdraft?

Answer 8

Short term, all businesses

Question 9

What is the type and availability of finance for trade credit?

Answer 9

Short term, al businesses

Question 10

What is the type and availability of finance for taking on a new partner?

Answer 10

Long term, partnerships only or sole traders who become partnerships

Question 11

What is the type and availability of finance for a loan?

Answer 11

Medium or long term (depends on the period of the loan)

Question 12

What is the type and availability of finance for share issue?

Answer 12

Long term, limited companies only

Question 13

What is the type and availability of finance for crowdfunding?

Answer 13

Medium or long term, all businesses

Question 14

How long would short term be?

Answer 14

Up to 12 months

Question 15

How long would medium term be?

Answer 15

1 to 5 years

Question 16

How long would long term be?

Answer 16

5 years or more

Question 17

What are the advantages of owners capital?

Answer 17

1) No need to repay the money
2) No interest has to be paid
3) No cost to raise the finance

Question 18

What are the disadvantages of owners capital?

Answer 18

If the owner or owners do not have enough savings, they will need to use another source of finance as well

Question 19

What are the advantages of retained profit?

Answer 19

1) No interest has to be paid
2) No need to repay the money
3) No cost to raise the finance

Question 20

What are the disadvantages or retained profit?

Answer 20

Only available to businesses that have made profits

Question 21

What are the advantages of sale of assets?

Answer 21

Good if the asset is no longer of use to the business

Question 22

What are the disadvantages of sale of assets?

Answer 22

1) Can take time to sell the asset
2) May not be possible to find a buyer

Question 23

What are the advantages of overdraft?

Answer 23

1) An overdraft can meet short term cash flow problems
2) The business can continue trading in the short term
3) The size of the overdraft varies monthly and interest is paid only on the amount borrowed

Question 24

What are the disadvantages of overdraft?

Answer 24

Interest is charged on the daily amount of money that the business owes to the bank. It can be expensive

Question 25

What are the advantages of trade credit?

Answer 25

1) This source of finance allows the business buying the goods to sell them on to a customer before payment is made to the supplier

2) It helps businesses that may have a temporary shortage of funds- a cash flow problem

3) The period of credit is usually interest free

Question 26

What are the disadvantages of trade credit?

Answer 26

1) The goods must be paid for even if they do not sell
2) Interest is charged if the credit is not repaid within the time limit

Question 27

What are the advantages of taking on a new partner?

Answer 27

1) A new partner may bring new skills to the business
2) No cost to raise the finance

Question 28

What are the disadvantages of taking on a new partner?

Answer 28

1) The new partner will have a say in the running of the business
2) The new partner will be entitled to a share of any profits

Question 29

What are the advantages of a loan?

Answer 29

1) Repayment is spread over time
2) Business knows the amount to be paid in instalments which helps budgeting

Question 30

What are the disadvantages of a loan?

Answer 30

1) Interest has to be paid
2) Business may need to risk an asset as security

Question 31

What are the advantages of share issue?

Answer 31

1) A lot of finance can be raised from many investors
2) Money does not have to be paid back
3) No interest is payable

Question 32

What are the disadvantages of share issue?

Answer 32

1) Dividends may have to be paid on the shares to shareholders

2) Shareholders are entitled to have a say in the running of the company

3) They business may be taken over and existing shareholders no longer own the business

Question 33

What are the advantages of crowdfunding?

Answer 33

1) A lot of money can be raised from a lot of contributors

2) Used for start-up or expansion

3) No security is needed for loans

Question 34

What are the disadvantages of crowdfunding?

Answer 34

1) Interest will need to be paid on loans
2) Profits may need to be shared if equities are sold

Question 35

What is interest?

Answer 35

The amount of money that has to be paid on borrowed money

Question 36

What is security?

Answer 36

Something of value that is offered to a lender as a form of guarantee of payment

Question 37

What are loans?

Answer 37

Sums borrowed for a certain period at an agreed rate of interest

Question 38

What is overdraft?

Answer 38

An arrangement with a bank that a business can spend more money than it has in its account

Question 39

What is trade credit?

Answer 39

When a supplier allows a business to receive the goods now that it can sell and then pay for it later

Question 40

What is retained profit?

Answer 40

Profit that is not distributed to shareholders as dividend

Question 41

What is sale of assets?

Answer 41

Items sold by the business

Question 42

What is share issue?

Answer 42

Money raised from investors by selling new shares

Question 43

What is crowdfunding?

Answer 43

Money raised through an appeal to the public, money raised from ‘sponsors’ or ‘donors’