Podcast
Questions and Answers
What is one disadvantage of using bank loans for financing a business?
What is one disadvantage of using bank loans for financing a business?
Government grants require repayment.
Government grants require repayment.
False
What is a primary advantage of using personal funds for business financing?
What is a primary advantage of using personal funds for business financing?
More flexibility
A _____ allows a business to acquire property without needing a high amount at once, secured against the property.
A _____ allows a business to acquire property without needing a high amount at once, secured against the property.
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Match the financing method with its primary disadvantage:
Match the financing method with its primary disadvantage:
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Which of the following is an advantage of using trade credit?
Which of the following is an advantage of using trade credit?
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Hiring purchase is beneficial for acquiring assets without immediate large payments.
Hiring purchase is beneficial for acquiring assets without immediate large payments.
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What is a common drawback of using an overdraft for financing a business?
What is a common drawback of using an overdraft for financing a business?
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Study Notes
Business Finance
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Trade Credit:
- Negotiating longer payment terms with suppliers
- Advantage: Avoids costly interest payments
- Disadvantage: Suppliers might become annoyed if payments are delayed; higher costs if payment terms are poor.
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Share Issue:
- Investors pay a sum of money in exchange for shares.
- Advantage: Avoids interest payments, avoids giving up ownership until the loan is repaid.
- Disadvantage: Giving up some ownership and sharing profits.
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Hire Purchase:
- Financing the purchase of an asset like machinery.
- Advantage: Asset is used without paying large amounts upfront
- Disadvantage: Asset is not owned until the final payment, interest payments are costly
-
Leasing:
- Renting or hiring assets (machinery).
- Advantage: Usage of machinery/equipment without large upfront payments
- Disadvantage: Asset is not owned, expensive in the long term
-
Bank Loan:
- Short-term/long-term loan from a bank
- Advantage: Quick access to funds, useful to cover short periods (ST loans).
- Disadvantage: Higher interest rates, rigid agreements
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Mortgage:
- Long-term loan secured against property.
- Advantage: Use of the property without paying large upfront amounts, property is owned after final payment;
- Disadvantage: Interest payment, if payments are not met the bank takes the property
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Government Grants:
- Funding from the government
- Advantage: No need to payback, potentially useful for startup businesses
- Disadvantage: strict conditions and criteria to qualify for funding
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External sources:
- Personal fund, trade credit, bank loan, mortgages, etc.
- Advantage: Multiple options for funding, avoid giving up ownership
- Disadvantage: Interest rate, high risk if funding is personal
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Additional Partners:
- Other persons becoming part owners in the business
- Advantage: Access to more capital, knowledge, and experience.
- Disadvantage: Giving up ownership percentage, sharing profits.
Starting a Business
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Detailed Business Plan:
- Creating a detailed document outlining business objectives, strategies, and financial forecasts.
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Business Environment:
- External Factors: economic conditions, competition, government regulations
- Internal Factors: business structure, management decisions, employee relations
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Description
This quiz covers key concepts in business finance, including trade credit, share issuance, hire purchase, leasing, and bank loans. Each financing method is analyzed for its advantages and disadvantages, providing a comprehensive understanding of how businesses manage their financial needs. Test your knowledge on these crucial topics!
