LOD

Question 1

what is short term source of finance

Answer 1

Short term – paid back within one year (< 1 yr)

Question 2

What is long term source of finance

Answer 2

Long term – paid back over a period greater than one year (> 1yr)

Question 3

What are internal sources of finance

Answer 3

come from within the business. This is the finance or capital which is generated internally by the business. Unlike external sources of finance which are externally sourced from banks or financial institutions, such as loans

Question 4

How can a business internally finance its business?

Answer 4

Retained profit
Net current assets
Sale of assets

Question 5

What is retained profits

Answer 5

When a business makes a profit it can decide whether to take that money out of the business as a salary or a dividend similarly they can decide to reinvest it back into the business to expand or buy new equipment etc.

Question 6

What is net current assets

Answer 6

Net current assets are current assets minus current liabilities.
Current Assets are things of value that can be turned into cash quickly. (Cash, Stock, Debtors)

Question 7

What is sales of assets

Answer 7

A business can sell assets that they have to receive a cash injection. For example, the business could have land, property or machinery that it could sell and then use that cash to invest in something else that may be more useful to the business.

Question 8

What are the advantages of retained profits

Answer 8

No interest charges
Available immediately
Avoids debt
No loss of ownership

Question 9

What are the advantages net current assets

Answer 9

Quick way of raising money
Encourages the business to manage its cash flow

Question 10

What are the advantages sales of assets

Answer 10

Good way of raising funds from assets no longer needed
No interest charged
Reduces capital tied up in useless assets

Question 11

What are the disadvantages of retained profits

Answer 11

Amount available may be limited
Could cause shareholder dissatisfaction as dividend payment would be reduced
Once used it cannot be used for other purposes

Question 12

What are the disadvantages of net current assets

Answer 12

Short credit terms for debtors can ruin relationships with customers
Holding less stock could impact availability
May have to set lower prices to sell through stock quicker

Question 13

What are the disadvantages of sale of assets

Answer 13

May not receive full value of the asset if a quick sale is needed
If the asset is needed then costs could increase to lease a similar asset back

Question 14

What is external source of finance

Answer 14

to money that comes from outside a business.

When a company needs a lot of money and its internal sources of finance are exhausted, the company can look to external sources for that finance.

Question 15

What are the external source of finance

Answer 15

Owner’s capital
Crowd funding
Loans
Mortgages
Venture capital
Debt factoring
Hire purchase
Leasing
Trade credit
Grants
Donations
Peer to peer lending
Invoice discounting

Question 16

What is owners capital

Answer 16

from the owner’s personal finances and is used to finance the business.
Although this person owns the business it is still classed as an external source of finance as it comes from outside of the business itself.

Question 17

What is a loan

Answer 17

is money lent to an individual or business that is paid off with interest over an agreed period. Usually this rate of interest is fixed. This means that the business knows in advance what thecost of borrowingwill be and what monthly repayments will be required. This allows the business to manage their cash flow.
The bank may require the business to secure itsassetsagainst the loan. This means that if the business is unable to repay the loan, the bank can demand the sale of the assets to raise money to pay back the loan.

Question 18

What is crowd funding

Answer 18

many people investing small amounts of money in a business, usually online. Commonly used crowdfunding websites include Crowdfunder, GoFundMe and Kickstarter.
Itprovides opportunitiesfor individuals to start up a business even if they don’t have access to other sources of funding.
It can bedifficult to reach the funding target.

Question 19

What are the advantages and disadvantages of owners capital

Answer 19

Advantages - No interest payments, No repayment schedule, No loss of ownership
Disadvantages - Limited amount available, Personal finances are at risk, Could cause friction between owners if all are not able to contribute the same amount

Question 20

What are the advantages and disadvantages of loans

Answer 20

Advantages - Easy to budget as repayments are pre-arranged, No loss of ownership

Disadvantages - Interest charged, Usually secured against an asset that could be seized if loan is not repaid, Show financial statements to banks to secure the loan

Question 21

What are the advantages and disadvantages of crowd funding

Answer 21

Advantages - No interest paid, Finance is received from a number of investors, Gauges peoples interest in the business
Disadvantages - Partial loss of ownership, May not reach your crowd funding target as interest in the business may not be there, Someone could steal your idea from the crowdfunding platform

Question 22

What is a Mortgage

Answer 22

a long term source of finance. It is a sum of money borrowed from the bank that is secured against a property and paid back ininstalments, usually over a long period of time I.e. 25 or 30 years.

Question 23

What is a venture capital

Answer 23

money invested by an individual or group that is willing to take the risk of funding a new business in exchange for an agreed share of the profits.
Theventure capitalistwill want areturn on their investmentas well as input into how the business is run.

Question 24

What is a Debt factoring

Answer 24

a business selling their invoices to a third party at a discounted price in order to bypass the hefty waiting times which are associated with invoice payments.
This means they receive the money they are owed quickly however it comes at a cost as the get a discounted amount from the debt factoring company.

Question 25

What are the advantages and disadvantages of mortgages

Answer 25

Advantages - Large amounts of finance can be acquired and then repaid over a long period of time, No loss of ownership or control Disadvantages - Interest charged on amount borrowed, Secured against asset that could be seized, Not suitable as a short term source of finance

Question 26

What are the advantages and disadvantages of venture capital

Answer 26

Advantages - Finance is made available along with advice and mentoring, Finance may be easier to obtain as venture capitalists are usually high risk high reward people Disadvantages - Loss of ownership and control, Conflicts may occur over the direction of the business

Question 27

What are the advantages and disadvantages of debt factoring

Answer 27

Advantages - Improves the businesses cash flow, Reduces risk of default on payments Disadvantages - Only receive a percentage of the amount the business is owed, Can alienate customers

Question 28

What is a Hire purchase

Answer 28

used to purchase an asset, such as a delivery van or piece of equipment. A deposit is paid and the remaining amount for the asset is paid in monthly instalments over a set period. The business does not own the item until all payments are made.

Question 29

What is leasing

Answer 29

a way of renting an asset that the business requires, such as a coffee machine. Monthly payments are made, and the leasing company is responsible for the provision and upkeep of the leased item

Question 30

What is trade credit

Answer 30

be agreed with a supplier and forms a credit agreement with them. This source of finance allows a business to obtain raw materials and stock but pay for them later.

Question 31

What are the advantages and disadvantages of hire purchase

Answer 31

Advantages - Regular payments are good for budgeting, Spreads out the cost of an asset, Avoids paying a large lump sum Disadvantages - Likely to cost more than buying the asset outright, Only suitable for lower cost items such as vehicles not land or buildings

Question 32

What are the advantages and disadvantages of leasing

Answer 32

Advantages - Maintenance and repairs are the responsibility of the supplier, Spreads the cost of the asset rather than paying a lump sum Disadvantages - Likely to cost more than buying outright, Never actually own the asset so the payments are ongoing

Question 33

What are the advantages and disadvantages of Trade credit

Answer 33

Advantages - Helps with cash flows due to delayed payments, No loss of ownership and control Disadvantages - Lose discounts for paying cash, Short term source of finance

Question 34

What is grants

Answer 34

A grant is a fixed amount of money usually awarded by the government, EU (European Union) or charitable organisations. Grants are given to a business on the condition that they meet certain criteria such as providing jobs in areas of high unemployment.

Question 35

What is donations

Answer 35

These are an extremely important source of finance for a non profit organisation such as a charity or social enterprise. Donations are relied upon for the continual running and day to day upkeep of such organisations.

Question 36

What is peer to peer lending

Answer 36

Peer-to-peer lending (P2P) is a way for people to lend money to individuals or businesses. The lender lends their money to an organisation or individual. In return the lender receives interest on top of the amount lent out.

Question 37

What is invoice discounting

Answer 37

invoice discounting is a form of short-term borrowing against your outstanding invoices. It is usually used to help improve a company’s working capital and cash flow position. Invoice discounting gives you access to the money in unpaid customer invoices much faster. Instead of waiting for your customers to pay your invoices, you take out a short-term loan from an invoice discounting company. 

Question 38

What are the advantages and disadvantages of Grants

Answer 38

Advantages - Does not need to be repaid, No interest payments, No loss of ownership or control Disadvantages - Have to meet certain conditions, Takes a long time to apply

Question 39

What are the advantages and disadvantages of donations

Answer 39

Advantages - No need to repay, No interest charged, No loss of ownership or control Disadvantages - Not reliable, Usually received in small amounts 

Question 40

What are the advantages and disadvantages of

Answer 40

Advantages - Interest rates can be lower than a traditional bank, Easier to budget as repayments are at a fixed rate Disadvantages - Amount available to borrow may be limited, Short term source

Question 41

What are the advantages and disadvantages of Invoice Discounting

Answer 41

Advantages - No interest Charged, Access to money faster, Helps resolve cash flow issues, Maintains relationship with customer, Insurance against non-payment may be available Disadvantages - Negatively impacts cash flow if invoice not paid (customer), Used for relatively small amounts, Fees are payable so adds additional cost (lost Revenue