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OCR A-Level Business
3. Accounting and Finance
3.1 Sources of Finance
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What is the primary purpose of sources of finance for a business?
To cover expenses
Retained profits are profits that are reinvested back into the business instead of being distributed to
shareholders
Selling underutilized assets is an example of an
internal
source of finance.
What is the main drawback of loans as an external source of finance?
Interest payments
Equity involves issuing shares to investors in exchange for capital, avoiding debt but diluting
ownership
Retained profits have no interest payments and maintain
business control
.
Why might a business choose a loan over retained profits for finance?
Large sums available
Using retained profits as a source of finance may upset
shareholders
Loans require collateral and involve
interest
payments.
What is a primary benefit of equity as a source of finance?
No debt
Retained profits are profits reinvested back into the business, avoiding the need for
loans
What is the main drawback of selling assets to raise capital?
Loss of asset use
Retained profits are an
internal
source of finance.
Loans provide large sums of capital but require
interest
Why might a business issue shares instead of taking a loan?
Avoid debt
Retained profits maintain business control but may have limited
availability
.
Internal sources of finance come from within the business, while external sources come from
outside
Match the source of finance with its characteristic:
Retained profits ↔️ No interest payments
Loans ↔️ Large sums available
Equity ↔️ Avoids debt
Sale of assets ↔️ Quick access to capital
Loans are an example of an
external
source of finance.
Internal sources allow a business to maintain full
control
What type of debt is incurred when a business takes out a loan?
May incur debt
Order the steps a business might take to secure external financing
1️⃣ Identify financial needs
2️⃣ Research available options
3️⃣ Prepare a financial proposal
4️⃣ Negotiate terms with lenders
5️⃣ Secure the financing
Which type of external financing does not require debt repayment?
Equity
Internal sources of finance maintain control and avoid
interest payments
.
What are internal sources of finance?
Funds from within the business
External
sources of finance
come from outside the business.
Retained profits are an example of an
internal
source of finance.
What is a key advantage of internal sources of finance regarding control?
Maintains full control
Loans are an external source of finance that incur
debt
.
Equity financing may lead to a dilution of
ownership
in the company.
Arrange the following internal sources of finance in order of complexity:
1️⃣ Retained Profits
2️⃣ Sale of Assets
What are retained profits in the context of finance?
Profits reinvested into the business
Match the internal source with its benefit:
Retained Profits ↔️ No interest, maintains control
Sale of Assets ↔️ Quick access to capital
Retained profits do not incur
interest
.
Selling underutilized assets provides quick access to
capital
.
What is an example of a company using retained profits as an internal source of finance?
Funding business expansion
Selling unused assets reduces
business
costs.
What is a loan in the context of external finance?
Borrowing with interest
An overdraft allows a business to have a temporary negative
balance
.
What is equity as an external source of finance?
Issuing shares for capital
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