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Questions and Answers
What is a primary disadvantage of using retained earnings for financing?
What is a primary disadvantage of using retained earnings for financing?
Which of the following is NOT true about long-term loans?
Which of the following is NOT true about long-term loans?
What benefit do debenture loans provide to a business?
What benefit do debenture loans provide to a business?
Why might a business prefer to use government finance over loans?
Why might a business prefer to use government finance over loans?
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What is one of the main risks associated with long-term loans?
What is one of the main risks associated with long-term loans?
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What is a common advantage of using retained earnings for business investments?
What is a common advantage of using retained earnings for business investments?
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Which type of financing is primarily available to businesses rather than sole traders?
Which type of financing is primarily available to businesses rather than sole traders?
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What is a downside of fixed interest rates on debenture loans?
What is a downside of fixed interest rates on debenture loans?
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Under what condition might a government grant become repayable?
Under what condition might a government grant become repayable?
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What is a disadvantage of using retained earnings compared to debt financing?
What is a disadvantage of using retained earnings compared to debt financing?
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Study Notes
Business and Household Income
- Business income sources: cash sales, credit sales, investment income, government grants, sale of fixed assets.
- Household income sources: wages, child benefits, social welfare, interest on savings.
Sources of Finance
- Vary based on purpose and timeline according to the matching principle.
- Types: short-term, medium-term, and long-term finance.
Short Term Finance
- Duration of up to one year; must be repaid within twelve months.
- Used for daily operational expenses like electricity, wages, and stock.
- Common sources: bank overdrafts, trade creditors, accrued expenses, factoring, and credit cards.
Bank Overdraft
- Allows account holders to withdraw more than the balance, up to an agreed limit.
- Advantages: only pay interest on used amounts, interest is tax-deductible, no security needed.
- Disadvantages: interest charges apply, limitations on withdrawal, must have a credit balance for 30 days before approval.
- Uses: purchasing stock, paying creditors, covering overheads.
Trade Creditors
- Enables businesses to receive goods now and pay later, freeing immediate cash flow.
- Also known as "leaning on the trade."
- Advantages: free finance source, no interest.
- Disadvantages: potential interest on late payments, loss of payment discounts, impact on credit rating.
- Exclusively available to businesses.
Accrued Expenses
- Involves delaying bill payments, allowing cash flow for other purposes.
- Example: VAT collected and paid later.
- Advantages: free finance source, no interest.
- Disadvantages: risk of service cutoff for late payments, possible interest on unpaid bills.
- Available to both households and businesses.
Factoring
- Selling debtors to a bank for immediate cash.
- Two types: with recourse (business liable for unpaid debts) and without recourse.
- Advantages: immediate cash injection, no security required.
- Disadvantages: expensive, suited for established businesses only.
Credit Card
- Used for purchases with payment due at the end of the month.
- Each card has a spending limit set by the bank.
- Advantages: no interest if paid on time, safer than cash.
- Disadvantages: high interest on unpaid bills, additional government taxes for cardholders.
- Available to both households and businesses.
Medium Term Finance
- Duration of 1 to 5 years; repayments within this timespan.
- Funds mid-range purchases like computers and equipment.
- Common sources: medium-term loans, hire purchase, leasing.
Medium Term Loan
- Borrowing from financial institutions with fixed repayment terms.
- Security may be required (e.g., property deeds).
- Advantages: immediate ownership, adaptable repayment terms.
- Disadvantages: interest charges, potential loss of security.
Hire Purchase
- Acquiring assets through initial payment followed by installments.
- Legal ownership transferred after the final payment.
- Advantages: immediate use of assets, spread payments over time.
- Disadvantages: interest on the total, repossession risk if payments are missed.
Leasing
- Renting assets with monthly lease payments.
- Business retains use without ownership unless arranged post-lease.
- Advantages: access to up-to-date equipment, tax-deductible lease costs.
- Disadvantages: no ownership (unless arranged), repossession risk.
Long Term Finance
- Duration exceeding 5 years; typically repaid after this period.
- Used for significant investments like property and business expansions.
- Common sources: owner's capital, share capital, retained earnings, venture capital, long-term loans, debentures, and government finance.
Owner’s Capital
- Personal savings invested into the business by the sole trader.
- Advantages: low-cost finance, no interest.
- Disadvantages: personal financial risk if the business fails.
Share Capital
- Equity sourced from shareholders purchasing shares, aiming for dividends.
- Advantages: no interest, permanent capital.
- Disadvantages: risk of diluted company control, no guaranteed dividends.
Retained Earnings
- Profits reinvested in the business instead of distributed as dividends.
- Advantages: no interest, control retention.
- Disadvantages: takes time to accumulate, potential shareholder discontent.
Long Term Loan
- Mortgages for substantial purchases, secured against the asset.
- Advantages: maintains company control, interest is tax-deductible.
- Disadvantages: obligatory interest payments, potential loss of security.
Debenture Loan
- Long-term loans available to companies with fixed interest rates.
- Advantages: company control retained, protects against rising rates.
- Disadvantages: interest payments required, fixed rates prevent accessing lower repayments.
Government Finance
- Grants that do not require repayment, often contingent on conditions like job creation.
- Offered by the Irish government and the EU for various business needs.
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Description
Test your knowledge on various sources of business and household income, as well as the types and durations of finance. From cash sales to child benefits, and short-term to long-term finance options, this quiz covers essential concepts in finance. See how well you understand the different components that contribute to financial stability.
