Sources of Finance for Businesses

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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?

It decreases as the asset no longer appears on the balance sheet Signup and view all the answers

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

When the business is in its first year of trading Signup and view all the answers

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

They typically do not require security. Signup and view all the answers

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

New businesses do not have historical sales data. Signup and view all the answers

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

It offers lower rates than traditional banks. Signup and view all the answers

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

They allow business owners to run the business independently. Signup and view all the answers

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

The funding originates from multiple investors. Signup and view all the answers

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

Overdraft facilities. Signup and view all the answers

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

Friend and family loans Signup and view all the answers

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

It may not provide sufficient funds for growth or expansion. Signup and view all the answers

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

A source is the origin of funds, while a method is how those funds will be used. Signup and view all the answers

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

Venture capital Signup and view all the answers

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

It can lead to tensions if the finance is not repaid. Signup and view all the answers

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

Getting a loan to purchase a coffee machine. Signup and view all the answers

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

It demonstrates poor financial management. Signup and view all the answers

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

Crowd funding Signup and view all the answers

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

To avoid the complexities of loans from banks. Signup and view all the answers

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

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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.