Sources of Finance for Businesses
20 Questions
2 Views

Choose a study mode

Play Quiz
Study Flashcards
Spaced Repetition
Chat to Lesson

Podcast

Play an AI-generated podcast conversation about this lesson

Questions and Answers

What does owner's capital represent in a business?

  • The net assets of the company after debts are paid (correct)
  • The total liabilities the owner has incurred
  • The amount of money borrowed to start the business
  • The total revenue generated by the business

    • Which of the following businesses is most likely to use owner's capital to grow?

  • Limited liability companies
  • Franchises
  • Corporations
  • Sole traders and partnerships (correct)

    • What is a disadvantage of using retained profits as a source of finance?

  • Retained profits can lead to increased tax liabilities
  • Retained profits require extensive paperwork
  • Once used, retained profits cannot be allocated elsewhere (correct)
  • There is interest that must be paid on retained profits

    • What happens to a business’s attractiveness to investors when assets are sold?

    <p>It decreases as the asset no longer appears on the balance sheet (B)</p> Signup and view all the answers

    In what scenario might a business NOT have retained profits available for reinvestment?

    <p>When the business is in its first year of trading (C)</p> Signup and view all the answers

    What is one advantage of loans from friends and family compared to traditional lenders?

    <p>They typically do not require security. (C)</p> Signup and view all the answers

    What is a common disadvantage of obtaining a bank loan for a new business?

    <p>New businesses do not have historical sales data. (B)</p> Signup and view all the answers

    Which of the following is a feature of peer-to-peer funding?

    <p>It offers lower rates than traditional banks. (B)</p> Signup and view all the answers

    How do banks maintain control over the lending process compared to other financing options?

    <p>They allow business owners to run the business independently. (D)</p> Signup and view all the answers

    What is a disadvantage of peer-to-peer loans?

    <p>The funding originates from multiple investors. (B)</p> Signup and view all the answers

    What type of financial support may banks provide during cash flow problems?

    <p>Overdraft facilities. (D)</p> Signup and view all the answers

    Which financing method typically does NOT require a business plan to be submitted?

    <p>Friend and family loans (C)</p> Signup and view all the answers

    What is a potential disadvantage of selling assets for a business?

    <p>It may not provide sufficient funds for growth or expansion. (C)</p> Signup and view all the answers

    What distinguishes a source of finance from a method of finance?

    <p>A source is the origin of funds, while a method is how those funds will be used. (D)</p> Signup and view all the answers

    Which of the following is NOT listed as an external source of finance?

    <p>Venture capital (B)</p> Signup and view all the answers

    What is one of the disadvantages of obtaining finance from family and friends?

    <p>It can lead to tensions if the finance is not repaid. (C)</p> Signup and view all the answers

    Which of the following is an example of a method of finance?

    <p>Getting a loan to purchase a coffee machine. (B)</p> Signup and view all the answers

    Why might a start-up struggle if they sell their assets?

    <p>It demonstrates poor financial management. (B)</p> Signup and view all the answers

    Which external source of finance involves individuals pooling funds online for projects?

    <p>Crowd funding (C)</p> Signup and view all the answers

    What could be a possible reason a business might seek funding through peers?

    <p>To avoid the complexities of loans from banks. (B)</p> Signup and view all the answers

    Flashcards

    Owner's Capital

    The owner's investment in the business, representing their stake and the net assets after all debts are paid off.

    Retained Profit

    Profits that are kept within the business and reinvested for growth, providing a source of finance without interest payments.

    Sale of Assets

    Selling existing assets like machinery, land, or vehicles to raise finance. This can be a quick way to generate cash but reduces the business's resources.

    Expansion

    The process of increasing capacity by acquiring more resources, including physical assets, human capital, and technology.

    Signup and view all the flashcards

    Sources of Finance

    The financial resources available to businesses for funding operations, investments, and growth. Common sources include owner's capital, retained profits, and asset sales.

    Signup and view all the flashcards

    Selling assets

    Selling assets, such as equipment or property, to raise money for the business.

    Signup and view all the flashcards

    Loss of a key asset

    The potential loss of a key asset can hinder a business's operations and growth.

    Signup and view all the flashcards

    Questioning business's health

    Selling assets can raise doubts about the business's overall health and management.

    Signup and view all the flashcards

    Start-up's vulnerability

    A new business that relies heavily on its assets may face severe consequences if it has to sell them.

    Signup and view all the flashcards

    Method of finance

    The specific use or purpose of the finance, such as buying equipment or expanding operations.

    Signup and view all the flashcards

    External sources of finance

    Money provided to a business from sources outside the company, such as bank loans or investments.

    Signup and view all the flashcards

    Family and friends

    Friends and family providing funds to a business in various forms, such as loans or investments.

    Signup and view all the flashcards

    Friends and family loans

    Loans from family and friends are often more flexible, with lower interest rates and longer repayment terms. They may not require security or a formal business plan.

    Signup and view all the flashcards

    Bank loans for businesses

    Banks provide loans to businesses for startup or expansion, and offer overdraft facilities to help with temporary cash flow issues.

    Signup and view all the flashcards

    Advantages of bank loans

    Banks lend to businesses without demanding ownership stake, allowing the owner to maintain control and independent operation.

    Signup and view all the flashcards

    Disadvantages of bank loans

    Bank loans can be expensive compared to other sources of finance, and require on-time repayment. New businesses may find it difficult to secure a loan due to lack of historical sales data.

    Signup and view all the flashcards

    Peer-to-peer funding

    Peer-to-peer lending platforms connect businesses seeking finance with investors looking for good returns, often offering lower interest rates than banks.

    Signup and view all the flashcards

    Nature of peer-to-peer loans

    Peer-to-peer loans are considered private business loans, where the loan capital comes from multiple individual investors or small businesses.

    Signup and view all the flashcards

    Study Notes

    Sources of Finance

    • Different sources of finance exist for businesses
    • Owner's capital is one source
    • Owner's capital, also known as owner's equity, shows the owner's stake in the business
    • It represents the net assets (assets minus liabilities) of the business
    • Savings or redundancy payouts used to start a business are considered owner's equity
    • Owner's capital is suitable for sole traders and partnerships
    • Retained profits are another funding source
    • Retained profits are accumulated profits that a business keeps to reinvest into the business
    • There are advantages and disadvantages to retained profits
    • Retained profits offer no interest payments, and funds can be used to reinvest in the business
    • Disadvantages exist once the profit is used, it cannot be used elsewhere
    • If a business is new, it may not generate retained profits
    • If a business is not profitable, it has no retained profits available
    • Sale of assets is a way to raise finance
    • Assets refer to things of value owned by the business like machinery, land, premises, and vehicles
    • The sale of assets may make a business less attractive to investors, as the asset will no longer feature on the balance sheet
    • The sale of assets is useful when a business needs to raise cash quickly, or when a specific asset is no longer needed
    • Selling assets may raise questions about the state of the business
    • New startups may have difficulty if they need to sell their assets to operate
    • The difference between a source of finance (where the funding originates, e.g., bank) and a method of finance (what the funds are used for, e.g., to buy equipment) is crucial
    • External sources of finance include family and friends, banks, peer-to-peer funding, business angels, crowd funding, and other businesses
    • Family and friends may provide loans or shares
    • Banks offer loans and overdrafts for start-ups and growing businesses
    • Peer-to-peer funding allows businesses to borrow money from various investors
    • Business angels provide funding and experience to growing businesses
    • Crowd funding allows individuals to contribute to a project or business
    • Other businesses or investors might choose to invest in a startup for return on investment

    Advantages of selling assets

    • Improving business efficiency and capacity utilization
    • Raising capital for investments in other areas
    • Quick returns possible (e.g. same-day sale of certain assets)

    Disadvantages of selling assets

    • Insufficient funds for growth or expansion
    • Questions about the business's financial standing if assets need to be sold
    • Difficulty in financing for new businesses dependent on assets sales

    Family and friends

    • Advantages*

    • Loans or shares may be available without securities or with lower rates or longer terms compared to traditional loans

    • No business plan may be needed

    • Disadvantages*

    • Tension or conflict if the finances aren't repaid, or the business doesn't flourish.

    • Funds might be demanded back urgently.

    Banks

    • Advantages*

    • Banks will lend to businesses without requiring ownership stakes

    • The business owner retains control and doesn't have to share it with external investors such as an angel investor

    • Disadvantages*

    • Bank loans can be expensive, with high interest rates, needing repayment on time.

    • It might be difficult for new businesses to get loans due to the lack of historical data

    • Personal assets may have to be used as collateral to secure the loan.

    Peer-to-peer funding

    • Advantages*

    • Quick access to funding within a week, available to businesses online

    • Potential for higher investor returns compared to savings accounts (6-7% potential)

    • Disadvantages*

    • Loans might be classified as private business loans, making them difficult for all investors to access

    • Insufficient investors might make it impossible to access the total capital needed

    Business angels

    • Advantages*

    • Angels quickly decide on investment decisions

    • Owners get access to investors' knowledge & networking

    • Gain from mentorship and expert management skills without repayment, other than return on investment

    • Disadvantages*

    • Not financially suitable for small investments, potentially over £10,000 or above £500,000

    • Owner must give up part business ownership

    Crowd Funding

    • Advantages*

    • Alternative to traditional loans, good for small businesses

    • Low costs or no costs to begin with

    • Fund and promote business at the same time

    • Disadvantages*

    • Businesses need to showcase ideas with attractive presentations, to persuade investors efficiently

    Studying That Suits You

    Use AI to generate personalized quizzes and flashcards to suit your learning preferences.

    Quiz Team

    Related Documents

    Sources of Finance PDF

    Description

    This quiz explores various sources of finance available to businesses, including owner's capital and retained profits. Learn about the advantages and disadvantages of these funding options and understand their implications for business growth. Ideal for students studying business finance concepts.

    More Like This

    Effects of Decreasing Assets on Financial Statements Quiz
    6 questions

    Effects of Decreasing Assets on Financial Statements Quiz

    HealthfulMoldavite avatar
    HealthfulMoldavite
    Equity and Owner's Capital Quiz
    7 questions

    Equity and Owner's Capital Quiz

    DiversifiedLaboradite avatar
    DiversifiedLaboradite
    Sources of Owned Capital in Business Finance
    12 questions

    Sources of Owned Capital in Business Finance

    WorkableEquation avatar
    WorkableEquation
    Owned Capital and Retained Earnings Quiz
    12 questions

    Owned Capital and Retained Earnings Quiz

    SweetheartCottonPlant avatar
    SweetheartCottonPlant
    Use Quizgecko on...
    Browser
    Open
    Browser
    Browser