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level: Sources of Finance

Questions and Answers List

level questions: Sources of Finance

QuestionAnswer
name the 10 private sector sources of financeowners equity, bank loan, grant, reinvested profits, mortgage, leasing, hire purchase, bank overdraft, trade credit, issuing shares
describe owners equityfor sole traders and partnerships only, this is the money invested by the owner/partner into the business
what are the advantages of owners equity as a source of finance?the money doesn't have to be repaid, no interest has to be paid
what are the disadvantages of owners equity as a source of finance?there may be insufficient money to fund the business
describe bank loans as a source of financemoney from the bank which has to be repaid with interest over an agreed number of years
what are the advantages of bank loans as a source of financethe money can be obtained in one lump sum, repayments can be spread over several years so budgeting is easier
what are the disadvantages of bank loans as a source of financeinterest has to be paid, small businesses may find it hard to obtain a bank loan and may have to pay higher rates of interest
describe grants as a source of financemoney received form the Local Council, government, EU, or lottery for a specific purpose
what are the advantages of grants as a source of financethe money doesn't have to be repaid, a large amount of money can be received at one time
disadvantages of grants as a source of financethere may be certain restrictions as to what hte money can be used for, time consuming and complex application process
describe reinvested profits as a source of financeprofit leftover at the end of the year that has not been shared with owners
advantages of reinvested profits as a source of financethere are no extra costs eg interest to be paid
disadvantages of reinvested profit as a source of financethere may be insufficient money to fund the business
describe mortgage as a source of financea loan specifically for the purchase of property
advantages of mortgage as a source of financeamount can be repaid over a long period of time, such as 25 years
disadvantages of mortgage as a source of financeinterest has to be paid, if repayments are not made then the property may be repossessed
describe leasing as a source of financepaying a monthly fee for the use of equipment/vehicles (asset)
what are the advantages of leasing as a source of financecan obtain the asset without a large financial outlay, repairs are carried out by the leasing company as part of the agreement, can keep upgrading to the latest models/versions
what are the disadvantages of leasing as a source of financethe business will never own the asset, may end up paying more in the long run than purchasing the asset
describe hire purchase as a source of financebuying an asset and paying it back over several (eg 48 or 60 months). An initial down payment is normally required
what are the advantages of hire purchase as a source of financeallows businesses to buy assets without needing the full amount up front, once full payments have been made the asset is owned
disadvantages of hire purchase as a source of financethe asset is not fully owned until the last payment is made, the total paid is more than the value of the asset due to interest charges
describe bank overdraft as a source of financewithdrawing more money from your bank account than you have available
advantages of bank overdraft as a source of financeuseful as a short term source of finance to overcome cash flow problems, you are not tied into an agreement which requires repayment over several years
disadvantages of bank overdraft as a source of financean expensive form of borrowing with high interest charges, additional costs incurred if not pre arranged with the bank
describe trade credit as a source of financewhen goods and materials can be bought from suppliers but are not paid for until a later date (eg 30 days credit)
advantages of trade credit as a source of financecan buy goods and sell them on before payment is required, provided payment is made within the agreed number of months then no interest is charged
disadvantages of trade credit as a source of financemay lose out on prompt payment discounts, may gain a reputation as a slow payer
describe issuing shares as a source of financefor private limited companies only, selling shares to friends and family in return for part ownership of the company
advantages of issuing shares as a source of financelarge amounts of additional finance can be raised
disadvantages of issuing shares as a source of financedividends have to be paid which reduces the retained profit for the company, new shareholders will have a say in how the business is run and so ownership is diluted