Sources of Finance (Cambridge (CIE) A Level Business): Flashcards
Exam code: 9609
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Define internal source of finance.
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Cards in this collection (39)
Define internal source of finance.
An internal source of finance is finance that comes from inside the business, rather than from outside it.
Why is owner's investment a cheap source of finance?
Owner's investment is cheap because no interest has to be paid and it may not need to be repaid, which reduces pressure on cash flow.
True or False?
Using personal savings to finance a business carries no financial risk for the owner.
False.
Using personal funds increases the owner's financial risk. If the business fails, the owner could lose all the money they invested.
Define retained earnings.
Retained earnings are profit from previous years that has not been distributed to owners and is reinvested in the business.
What is the opportunity cost of financing the business with retained earnings?
The opportunity cost is that shareholders do not receive extra profit from their investment, as less money is available for dividends.
Retained earnings are not a suitable source of finance for _______ or new businesses with little or no profit from earlier years.
Retained earnings are not a suitable source of finance for start-ups or new businesses with little or no profit from earlier years.
Why is selling unwanted assets not a reliable source of finance?
It depends on the business having surplus assets to sell, and an old asset may have lost value and raise little money.
Define sale and leaseback.
Sale and leaseback is when a business sells a non-current asset, such as a building, for cash and then rents it back so it can keep using it.
True or False?
Over time, the total lease payments under a sale and leaseback arrangement can exceed the original value of the asset.
True.
The business must make regular lease payments, and over a long period these can add up to more than the asset was sold for.
Define working capital.
Working capital is the money a business has available for day-to-day operations, such as paying wages, suppliers and utility bills.
How can a business adjust its working capital to free up cash without borrowing?
It can delay payments to suppliers, reduce inventory levels, speed up payments from customers or use existing cash reserves.
True or False?
Freeing up working capital is a suitable way to finance large, long-term investments.
False.
Adjusting working capital improves short-term cash flow, but it is not suitable for large or long-term investments.
Why do sole traders and partnerships tend to rely on owner's investment and working capital?
They often have limited retained profit and fewer fixed assets to sell than larger businesses.
Which internal sources of finance are companies more likely to use than sole traders?
Companies are more likely to use retained profit, the sale of fixed assets and sale and leaseback, because they operate on a larger scale with more internal resources.
Define share capital.
Share capital is finance raised from the sale of shares in a limited company, through a flotation or a rights issue.
True or False?
Debenture holders are part-owners of a company and can vote at its annual general meeting.
False.
A debenture is a long-term loan with a fixed interest rate. Debenture holders are creditors, not owners, and have no voting rights.
Apart from capital, what can a new partner bring to a partnership?
A new partner may bring skills, experience or contacts that benefit the business.
Define venture capital.
Venture capital is finance provided by specialist investors in small- to medium-sized businesses with significant potential for growth.
With hire purchase, _______ of the asset passes to the business only after the final payment has been made.
With hire purchase, ownership of the asset passes to the business only after the final payment has been made.
Why can leasing an asset help a business's cash flow?
Leasing needs no large upfront payment, and maintenance and repair costs are usually the responsibility of the leasing company.
Define bank overdraft.
A bank overdraft is an arrangement with a bank that lets a business spend more money than it has in its account, up to an agreed limit.
True or False?
Interest on an overdraft is charged on the full agreed limit, whether or not it is used.
False.
Interest is charged only on the amount actually used, when the business goes overdrawn.
Define mortgage.
A mortgage is a long-term secured loan, typically used to buy buildings, land or large items of capital equipment.
True or False?
With debt factoring, a business receives the full value of the invoices it sells.
False.
The business sells its invoices to a third party at a discount, so it receives less than the full invoice amount, but it gets the cash immediately.
Trade credit is usually ___________, but the business loses any discounts for early payment.
Trade credit is usually interest-free, but the business loses any discounts for early payment.
Define micro-finance.
Micro-finance provides small loans and basic financial support to entrepreneurs or small businesses that do not qualify for traditional loans, particularly in developing economies or low-income communities.
Define crowdfunding.
Crowdfunding is raising finance by collecting small amounts of money from a large number of people, typically via online platforms.
True or False?
A business that receives a government grant must use the finance for its intended purpose.
True.
Grants are given to businesses that meet specific criteria, and the money must be used for its intended purpose, although it does not need to be repaid.
What type of finance is most suitable for buying fixed assets?
Fixed assets are most likely to need a long-term source of finance, such as a bank loan.
What type of finance could cover day-to-day costs such as rent and wages?
Day-to-day costs could be covered by a short-term overdraft.
A large amount of capital can be raised through a _______ on a stock exchange.
A large amount of capital can be raised through a flotation on a stock exchange.
True or False?
A sole trader can raise finance by issuing shares or debentures.
False.
Only businesses that are already public limited companies can issue shares or debentures. Sole traders often rely on owners' capital.
Why might a business with high gearing find borrowing expensive?
Businesses with existing loans are seen as risky, so they may have to pay high rates of interest.
True or False?
Leasing is a low-risk source of finance.
True.
Leasing involves little risk because the assets can be returned if the finance costs are not paid.
If a limited company issues too many shares, the current owners may lose some _____ of the business.
If a limited company issues too many shares, the current owners may lose some control of the business.
What makes a bank loan application more likely to be approved?
Approval is more likely when the business presents a convincing business plan, has minimal, well-managed existing external finance and can offer collateral.
True or False?
Shareholders are more likely to invest in a company when alternative investments are more attractive.
False.
Shareholders are more likely to invest when alternative investments are less attractive, the share price is improving, dividends are generous and the company has good profit potential.
Why do finance managers often prefer a bank loan to issuing new shares for an established, successful private limited company?
A bank loan avoids losing ownership and a share of future profits, and banks see an established business as less risky than a new one.
Why might trade credit be a better choice than an overdraft for a business that needs to replace inventory quickly?
Trade credit means the inventory does not have to be paid for straight away, so it can be sold before payment is due, and it avoids the interest charged on an overdraft.
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