business finance 2

• What is the main purpose of raising funds for businesses?

  To set up the business, maintain operations during cash shortages, and facilitate expansion.
• What factors determine the availability of investment funds for a business?

  The business's establishment, previous profits, security offered, and business type.
• What are the internal sources of finance for a business?

  • Reinvested profit
  • Sale of assets
  • Owners' capital
• How can a business raise finance through the sale of assets?

  By selling assets it no longer needs, such as an old factory site.
• Why might a business lease back an asset after selling it?

  To retain use of the asset while improving short-term cash flow.
• What is the benefit of reinvesting profit in a business?

  There is no interest to pay on reinvested profits, and it can lead to business growth.
• What is a potential downside of reinvesting profits for owners and shareholders?

  Less profit to be shared among owners and lower dividends for shareholders.
• What are the external sources of finance for a business?

  • Share issue or new partners
  • Venture capital
  • Bank loan
  • Leasing assets
  • Trade credit
  • Debt factoring
  • Overdraft from the bank
  • Hire purchase
• How can taking on a new partner help a sole trader?

  It brings in more capital and new skills for business growth.
• What is a share issue?

  The offering for sale of new shares in a business.
• What is a major problem associated with share issues?

  Ownership is spread over a larger number of shareholders, which may lead to control issues.
• What is an overdraft?

  A form of bank borrowing where a business withdraws more money than is in its account.
• What happens when a business exceeds its overdraft limit?


  The bank may demand repayment and charge high interest on the overdrawn amount.
• Why might a business prefer an overdraft for short-term cash flow problems?

  It provides immediate access to funds while waiting for payments from customers.
• What is a bank loan?

  A fixed amount lent by a bank for a specific purpose, requiring repayment with interest.
• What is trade credit?

  It allows a business to buy goods and pay for them later, improving short-term cash flow.
• What are the risks of extending credit periods with suppliers?

  Suppliers may become upset and deny future credit requests.
• How does leasing assets benefit a business?

  It allows the business to use an asset without the upfront cost of purchasing it.
• What is hire purchase?

  A financing method where the asset belongs to the business at the end of the hire period.
• What is venture capital?

  Money invested in a business by professional investors who expect a say in management and profits.
• What do venture capitalists expect in return for their investment?

  A shareholding in the business and a good profit within two to three years.
• What is debt factoring?

  It involves finance companies paying a business part of an invoice's value immediately after a sale.
• How does debt factoring improve cash flow for a business?

  It allows the business to access cash immediately instead of waiting for customer payments.
• What is a potential downside of debt factoring?

  The business receives less than the full invoice value.