5.2 Sources of finance

• What are sources of finance used for by businesses?

  To obtain capital
• Match the type of finance with its characteristic:

  Internal finance ↔️ No external costs

  External finance ↔️ Large capital available
• Internal sources of finance include retained profits and sales of assets
• What is the repayment period for short-term financing options?

  Less than one year
• What does factoring involve selling to a third party?

  Invoices
• Match the financing option with its disadvantage:

  Share capital ↔️ Dilutes ownership

  Bank loans ↔️ Requires collateral
• What is the main difference between internal and external sources of finance?

  Cost and availability
• Factoring reduces the risk of bad debts
• Bank overdrafts provide quick access to funds
• Leasing preserves capital but results in higher overall costs
• Selling share capital dilutes ownership
• Match the financing source with its primary advantage:

  Internal sources ↔️ No external costs

  Bank loans ↔️ Predictable repayments

  Share capital ↔️ Large capital available
• What is a key disadvantage of a bank overdraft?

  Interest charges
• A bank overdraft provides quick and flexible access to funds
• Short-term financing options often have interest charges and less control
• What is the main risk associated with mortgages?

  Losing property
• Sources of finance can be categorized into internal and external types.
• A tech startup receiving venture capital gains large capital infusions and guidance.
• External sources of finance may dilute ownership of the business


  True
• A bank overdraft provides quick and flexible access to funds
• Short-term financing options often have interest charges and less control
• Venture capital firms provide large capital infusions in exchange for equity

  True
• Order the short-term financing options based on increasing risk:

  1️⃣ Trade credit

  2️⃣ Bank overdraft

  3️⃣ Factoring

  4️⃣ Leasing
• Leasing equipment preserves capital but increases overall costs


  True
• Trade credit does not charge interest, but may incur late payment penalties


  True
• What is the time period for long-term financing options?

  Longer than one year
• What do venture capital firms typically provide in addition to funding?

  Expertise and guidance
• Internal sources of finance are limited in amount
• Factoring improves cash flow but reduces control over credit management
• Trade credit can help manage cash flow but may lead to bad debts.


  True
• What is the main purpose of long-term financing options?

  Significant investments
• Share capital provides large capital without repayment obligations but dilutes ownership.

  True
• External sources of finance offer larger amounts of capital but may dilute ownership.


  True
• A bank loan requires collateral and is subject to bank approval.


  True
• Trade credit helps manage cash flow but may lead to bad debts


  True
• What is the repayment period for long-term financing options?

  More than one year
• Using retained profits for financing involves no interest charges but limited capital
• Why is trade credit beneficial for managing cash flow?

  No interest is charged
• What is the time period for short-term financing options?

  Less than one year
• What is the primary advantage of factoring invoices?

  Improves cash flow