Unit 6.1 - Sources of finance

Question 1

Name reasons that firms need finance (5)

Answer 1

New firms need start up capital
New firms have poor initial cash flow - they need additional finance to cover this
Sometimes customers delay payment
Need it for day-to-day running costs
To expand

Question 2

Benefits of a government grant (2)

Answer 2

For new or small firms

Don’t need to be repaid

Question 3

Costs of a government grant (3)

Answer 3

Fewer options of grants
Strict criteria must be met
Money may have to be spent in a specific way

Question 4

Benefits of trade credit (2)

Answer 4

Time given for businesses to pay (1-3 months)

Help cash flow

Question 5

Costs of trade credit (3)

Answer 5

Can cause negative cash flow later
Suppliers may want to see financial performance
May need to pay a large fee if payment late

Question 6

Benefits of overdrafts (2)

Answer 6

Take out more money than is paid into account

Give additional capital to pay bills on time

Question 7

Costs of overdrafts (3)

Answer 7

Higher interest rate
Can be cancelled at any time
If not paid off, bank can take some of the business’s assets

Question 8

Benefits of bank loans? (3)

Answer 8

Quick and easy to take out
Lower interest rates than an overdraft
Structured repayments

Question 9

Costs of bank loans (2)

Answer 9

Pay interest

If not paid off, bank can take some of the business’s assets

Question 10

Benefits of family and friends loans (3)

Answer 10

Quick and easy to take out - easier than a bank
Go into business immediately
No interest

Question 11

Costs of family and friends loans (2)

Answer 11

Individual may expect a share in the profits of the business (or become a partner)
Usually only a small amount

Question 12

Benefits of a mortgage (3)

Answer 12

Used to finance property
Structured repayments
Relatively low interest payments

Question 13

Costs of a mortgage (2)

Answer 13

Property is used as collateral

Interest has to be paid

Question 14

Benefits of hire purchase (3)

Answer 14

Buying something in instalments - might require a deposit
Structured repayments
Have use of the product whilst paying for it

Question 15

Costs of hire purchase (2)

Answer 15

Don’t own until all payments are complete

May have interest

Question 16

Benefits of retained profits (3)

Answer 16

Profit put back into the business
Readily available
No interest

Question 17

Costs of retained profits (2)

Answer 17

Under pressure from shareholders to give large dividends - reducing retained profit
Opportunity cost

Question 18

Benefits of selling assets (2)

Answer 18

Selling unused assets

Usually no longer required

Question 19

Costs of selling assets (3)

Answer 19

Limit to how many assets that can be sold
May sell and still need them
Assets may not be of much value

Question 20

Benefits of new share issue (2)

Answer 20

Selling more shares to investors

Doesn’t need to be repaid

Question 21

Costs of new share issue (3)

Answer 21

May lose control
Expect dividends
Will reduce current shareholder value

Question 22

Name all external sources of finance (8)

Answer 22

Bank loans
Overdrafts
Mortgage
Family and friends loan
New share issue
Trade credit
Government grant
Hire purchase

Question 23

Name all internal sources of finance (3)

Answer 23

Personal or business savings
Retained profits
Selling fixed assets

Question 24

Name all the factors that affect the choice of finance (4)

Answer 24

Size and type of company
Amount of money needed
Length of time
Cost of the finance