Learning Aim D

Question 1

Sources of finance (3) ?

Answer 1

Retained profit
Net current assets
Sale of assets

Question 2

Retained profit ?

Answer 2

Profit kept in the business to fund future expenditure

Question 3

Net current assets ?

Answer 3

Money available in the business to fund day to day expenses

Question 4

Sale of assets ?

Answer 4

Selling an item of worth owned by a business in order to achieve an immediate cash injection

Question 5

What is Owners capital ?

Answer 5

Money invested in the business from owners personal savings

Question 6

What is loans ?

Answer 6

Money borrowed from financial institution for a set period of time

Interest will be payable on the loan

Question 7

What is crowd funding ?

Answer 7

Attracting investment from a larger number of speculative investors, usually through social Media

Question 8

What is a mortgage ?

Answer 8

A long term loan usually about 25years, secured against an asset E.g. building

Interest will be paid on mortgage

Question 9

What is venture capital?

Answer 9

Investment from an experienced entrepreneur in return for a stake/equity in the business

Question 10

What is debt factoring ?

Answer 10

Selling on of a businesses debts to 3rd party to receive cash quickly.

Factor company pays business percentage of money owed and takes on responsibility of chasing debts

Question 11

What is hire purchase ?

Answer 11

Paying to use an asset in instalments to spread the cost over its useful life

Asset will remain property of seller until final instalment has been paid

Question 12

What is leasing ?

Answer 12

Paying to use an asset in instalments to spread cost of its useful life

Ownership remains with seller throughout agreed lease

Question 13

What is trade credit ?

Answer 13

Period of time offered by suppliers to allow customer to purchase a good or service now and pay later E.g. 30 days after purchase

Question 14

What are grants ?

Answer 14

A lump sum of money given by the government, can be used to provide and fund employment in deprived areas or for environmentally friendly research

Question 15

What are donations ?

Answer 15

A lump sum of money given voluntarily to a charity or social enterprise

Question 16

What is peer to peer lending ?

Answer 16

When one business person lends money to another business person in return for interest payments

Question 17

What is invoice discounting ?

Answer 17

Reductions offered to customers

Question 18

Advantages of owners capital ?

Answer 18

No interest payments or need to repay

High level of commitment from owner

Question 19

Disadvantages of owners capital?

Answer 19

Amount available may be limited

More than one owner can cause friction

Question 20

Advantages of loans ?

Answer 20

Regular pre agreed repayments make planning and budgeting easier

Ownership and control not lost

Question 21

Disadvantages of loans ?

Answer 21

Interest is charged on amount borrowed

Interest rates can fluctuate

Often secured against an asset that can be seized if failure to meet repayments

Interest must be paid regardless if profit is being made

Question 22

Advantages of crowd funding ?

Answer 22

Ability to raise finance from large group of investors

No interest is paid

Question 23

Disadvantages of crowd funding?

Answer 23

Partial loss of ownership

No guarantee that crowd funding will attract sufficient investment

Question 24

Advantages of mortgages ?

Answer 24

Large amounts of finance can be raised and repaid over long period of time

Ownership or control isn’t lost

Question 25

Disadvantages of mortgages ?

Answer 25

Interest is charged on amount borrowed Often secured against asset Interest must be paid regardless of profit Not suitable for small amounts

Question 26

Advantages of venture capital?

Answer 26

Finance provided by business professional Venture capitalists are likely to be high risk takers

Question 27

Disadvantages of venture capital?

Answer 27

Partial loss of ownership and control Conflict may arise between entrepreneur and venture capitalist

Question 28

Advantages of debt factoring ?

Answer 28

Speeds up flow of cash into business from debts Factor company takes on the risk of bad debt

Question 29

Disadvantages of debt factoring ?

Answer 29

Only receive a percentage of amount owed, therefore reducing profit Can give wrong impression or alienate customers

Question 30

Advantages or hire purchase ?

Answer 30

Avoids need to pay lump sum for use or asset Regular instalments makes planning and budgeting easier Spreads cost

Question 31

Disadvantages of hire purchase ?

Answer 31

Overall amount paid for asset is likely to be higher than if purchased outright Only really suitable for low cost assets E.g. vehicles, not premises

Question 32

Advantages of leasing ?

Answer 32

Responsibility for repairs stays with supplier Spreads cost

Question 33

Disadvantages of leasing ?

Answer 33

Overall amount paid likely to be higher than bought outright Never actually have ownership of asset therefore payments will be ongoing

Question 34

Advantages of trade credit ?

Answer 34

Delays need to pay for goods and services when purchased therefore aiding cash flow No loss or ownership or control

Question 35

Disadvantages of trade credit ?

Answer 35

Potential loss of discounts offered for cash payments Only suitable for short term source of finance

Question 36

Advantages of grants ?

Answer 36

No need to repay No interest charges No loss of ownership or control

Question 37

Disadvantages of grants ?

Answer 37

Lengthy application process May only be rewarded if certain conditions are met

Question 38

Advantages of donations ?

Answer 38

No need to repay No interest charges No loss of ownership and control

Question 39

Disadvantages of donations ?

Answer 39

Likely to be small amounts Unpredictable

Question 40

Advantages of peer to peer lending ?

Answer 40

Interest rates can be lower than lending from traditional financial institutions Fixed rate of interest can be agreed

Question 41

Disadvantages of peer to peer lending ?

Answer 41

Amount available may be limited and only available for a short time

Question 42

Advantages of invoice discounting ?

Answer 42

No need to repay No interest charges No loss of ownership or control Reduces costs to business therefore increases profit

Question 43

Disadvantages of invoice discounting ?

Answer 43

Often only available if purchases are made in cash, therefore affecting cash flow