3.1 Sources of Finance

    Cards (157)

    • 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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