5.2 Sources of Finance Flashcards

All 38 cards in this deck

What does 'selling assets' mean as a source of finance?

Raising cash by selling items the business owns but no longer needs, such as machinery, vehicles or property.

Give one drawback of an overdraft.

Any one of: the bank may charge a high rate of interest, increasing costs; the bank can ask for it to be repaid or withdraw it at short notice.

Give one disadvantage of using retained profit.

Any one of: it may not be large enough to fund expansion; once used, it cannot be used for other purposes.

Give one advantage of a bank loan.

Any one of: a large sum is available at once; it is repaid in fixed instalments, so repayments are easy to plan; the owners give up no share of the business; interest is usually lower than on an overdraft.

Give one disadvantage of a bank loan.

Any one of: interest must be paid, increasing fixed costs; repayments are larger cash outflows, raising the risk of cash-flow problems.

Give one advantage of raising finance through a new share issue.

Any one of: the money does not have to be repaid; no interest is charged; a large amount can be raised, especially by a plc selling to the public.

Give one advantage of selling assets to finance growth.

Any one of: it turns an asset the business no longer uses into cash; there is no interest to pay or loan to repay; the owners give up no share of the business.

Give one drawback of selling assets to finance growth.

Any one of: the business no longer has the use of the asset; an asset can only be sold once; a quick sale may raise less than the asset is worth.

True or false? A sole trader can raise finance through a new share issue.

False. Only a limited company can raise finance by issuing shares; a sole trader has no shares to sell.

Why may a new business find it difficult to obtain a bank loan?

It has no trading record and revenue may be unpredictable, so it cannot prove to the bank that it can repay.

True or false? Retained profit is a suitable source of finance for a brand new business.

False. A new business has not yet made any profit to retain, so it must use external sources or the owner's own funds.

Give two factors a business should consider when choosing a source of finance.

Any two of: the amount it needs to raise; how long it needs the money for; how much the finance costs (e.g. interest); the type and size of business, since not every source is open to every business.

What is an overdraft?

An agreement with the bank allowing a business to overspend on its account, up to a limit.

What is trade credit?

An agreement allowing a business to buy goods from a supplier now and pay for them at a later agreed date.

What is a bank loan?

A fixed sum borrowed from a bank and repaid, with interest, in regular instalments over an agreed number of years.

What is retained profit?

Profit kept in the business after costs and tax, reinvested rather than paid out to owners.

Name two short-term sources of finance for a small business.

Overdraft and trade credit.

What is a share issue?

Selling new shares in a limited company to investors, who become part-owners, to raise money.

What is crowdfunding?

Raising finance from a large number of people, usually online, each contributing a small amount.

What is owners' capital as a source of finance?

Money the owner or owners put into the business, often from personal savings. It has no interest and no repayments, but the owner loses it if the business fails.

Name three long-term sources of finance for a business.

Any three of: owners' capital; a new partner; a loan; a share issue; retained profit; crowdfunding.

Give one advantage of trade credit.

Any one of: the business can sell the goods before paying the supplier, improving cash flow; no interest is charged if credit terms are met.

Give one disadvantage of trade credit.

Suppliers may not offer it to a small business placing small orders.

Give one advantage of an overdraft.

It provides cash in months when demand is low, supporting the business until demand increases.

Give one advantage of using retained profit.

It is cheap — no interest is paid and ownership is not diluted, so owners keep full control.

Give one disadvantage of raising finance through issuing shares.

Issuing a large number of shares reduces the percentage ownership of existing shareholders.

Give one advantage of crowdfunding compared with a bank loan.

Any one of: no security has to be offered; with reward or donation crowdfunding, nothing is repaid and no interest is paid.

Give one disadvantage of crowdfunding.

If not enough money is raised, the business cannot cover the costs it needs to fund.

What is the difference between short-term and long-term finance?

Short-term finance is usually repaid within a year and pays for day-to-day costs such as stock or bills. Long-term finance covers a longer period, often several years, and pays for starting up or expanding the business.

Name four reasons, other than expansion, why a business may need finance.

Establishing a new business; running the business day to day (e.g. buying raw materials and paying wages); recruitment; marketing.

Why can an overdraft be cheaper than a loan for short-term needs?

Interest is only paid on the amount actually overdrawn, and only for as long as it is used.

What is taking on a new partner as a source of finance?

Bringing a new owner into a sole trader business or partnership, who puts their own money into the business in return for a share of it.

Give one advantage of raising finance by taking on a new partner.

Any one of: the partner may bring new skills or experience; nothing has to be repaid and no interest is paid.

Give one disadvantage of raising finance by taking on a new partner.

Any one of: the new partner is entitled to a share of the profits; the new partner will have a say in how the business is run.

What is security on a bank loan?

Something valuable the borrower offers, such as property, that the lender can sell to get its money back if the loan is not repaid.

What can a supporter get in return for money given through crowdfunding?

It depends on the scheme: nothing (a donation), a reward such as the finished product, interest on money lent, or a share of the business.

Name two sources of finance usually only open to established businesses, not new ones.

Retained profit and the sale of assets: a new business has no past profit to keep and few assets it can spare.

Why must a business take care when buying stock on trade credit?

The supplier must still be paid even if the goods do not sell, and paying late may mean interest or charges.