Unit 5.3-Sources of finance

Question 1

Name all sources of finance

Answer 1

Overdraft, f&f loans,bank loans,trade credit, new share issue,selling assets,owners funds, retained profit,debt factoring,debenturing, hire purchase, mortgag ,venture capital, crowd funding

Question 2

Describe debt factoring and name + and -?

Answer 2

Selling your debt to others businesses
+ Allows businesses to get the cash at that instant to solve their own liquidity crisis.
- Missing out on full value of that debt

Question 3

Describe Overdraft and name + and -?

Answer 3

Spend even when they have run out of money due to extension on bank account funds.
+Allows businesses to continue purchasing the assets that they need to produce even when they don’t have the cash to do so
+Acts as a safety net for most businesses
- You have to pay to have an overdraft (high interest)

Question 4

Describe Retained profit and name + and -?

Answer 4

Businesses uses some of the previous years profit to spend on growth and advancement.
+You don’t have to pay any interest on the sum
- That is money being taken away from the shareholders

Question 5

Debenturing

Answer 5

Bringing new owners into the organisation in return for a stake in the business.
+ Brings you large sums of money
+ Some shareholders joining the organisation will bring new industry knowledge,expertise,contacts in the industry.
- Losing control of the business

Question 6

Bank loans

Answer 6

+Can raise significant amounts of capital
+ Business can schedule regular repayments and plan for the future
- They must pay back the original sum borrowed but with interest on top

Question 7

Mortgage

Answer 7

Loan from the bank to buy property or land.
+ Regular monthly repayment that is on a fixed rate of interest
+ interest payments are tax deductible
- You will likely need to raise a substantial amount for a deposit on the property

Question 8

Friends and family loans

Answer 8

Loan from your friends or family

Question 9

Venture capital

Answer 9

Encouraging other entrepreneurs (known as business angels) to invest in the business in return for a share of the business or lend the organisation cash if the bank refuses to do so
+ Business gains new industry knowledge,expertise,contacts in the industry.
- If capital is borrowed they will charge high interest as you are considered more of a risk

Question 10

Trade credit

Answer 10

You get something but don’t have to pay for it until later
+ Can get what you want when you need it
- can be charged interest

Question 11

New share issue

Answer 11

Selling shares to raise capital
+ can raise substantial amounts
- lose control of the business

Question 12

Owners funds

Answer 12

Using the owners personal cash for expansion and growth
+ No interest and long term financial benefits for the owner
- Not guaranteed to make that cash back

Question 13

Hire purchase

Answer 13

Renting a product and paying in instalments
+ Has regular repayments that can be planned for
- Can be charged interest

Question 14

Government grant

Answer 14

When the government lends money to a business for a specific reason
+ Reliable source of finance, don’t have to pay it back
- Can take a long time to get, normally given to smaller businesses

Question 15

Crowdfunding

Answer 15

+Often feedback and expert guidance

-need a lot of interest in the business and good reputation needed