Sources of Finance

• What is the primary purpose of short-term finance for a business?

  To help maintain a positive cash flow
• What is retained profit in a business context?

  Retained profit is the profit that a business leaves in the business to reinvest for expansion.
• What is personal savings in the context of business finance?

  Money that has been saved up by an entrepreneur.
• How can short-term finance assist a business during seasonal cash flow issues?

  It can help the business get through periods of poor cash flow, such as during a rainy summer for an ice cream seller
• Why is retained profit considered a desirable source of finance?

  Because it does not incur interest charges or require the payment of dividends.
• Why does personal savings not cost the business?

  Because there are no interest charges applied.
• In what situation can short-term finance bridge a gap for a business?

  When a large payment is delayed, leaving the business without enough money to pay its bills
• What is crowdfunding?

  Crowdfunding involves a large number of people investing small amounts of money in a business, usually online.
• What is venture capital?

  Money invested by an individual or group willing to fund a new business in exchange for a share of the profits.
• How does short-term finance provide extra cash for manufacturing?


  It provides cash to meet sudden or unexpected changes in customer orders
• Name three common crowdfunding websites.

  Crowdfunder, GoFundMe, and Kickstarter.
• What do venture capitalists expect in return for their investment?

  A return on their investment and input into how the business is run.
• What is one of the most common forms of short-term finance?

  Overdrafts
• What are the advantages of crowdfunding?

  • Acts as a form of market research.
  • Provides opportunities for individuals to start a business without other funding sources.
• What is share capital?

  Money raised by shareholders through the sale of ordinary shares.
• What does it indicate if people do not invest in a crowdfunding campaign?

  • The business idea may not be attractive or distinctive enough.
  • It suggests that the business is likely to fail.
• Why should overdrafts be used carefully?

  Because they can become expensive due to high interest rates charged by banks
• What rights do buyers of shares gain?

  Part ownership of the business and the right to vote on changes to the business.
• What are the disadvantages of crowdfunding?

  • The business must be interesting and appealing.
  • It can be difficult to reach the funding target.
• What is a common feature of a bank overdraft regarding interest rates?

  They have variable interest rates
• What are the advantages of share capital?

  • Permanent capital: Shareholders cannot have a refund on their shares.
  • No dividends if the business has a poor year: Dividends are only paid if the business has made sufficient money.
• What is a key statistic regarding crowdfunding success rates?

  Less than 33 percent of businesses achieve their funding target.
• What are the disadvantages of share capital?

  • Dilutes control for the founders: More shares mean less control for founders.
  • Vulnerable to takeover: Selling more shares increases the risk of a takeover.
• How does the flexibility of an overdraft benefit a business?

  A business only pays interest when the overdraft is used
• What is a bank loan?

  Money lent to an individual or business that is paid off with interest over an agreed period of time.
• What power do banks have regarding overdrafts?

  Banks can demand full repayment of an overdraft within 24 hours
• How does a fixed interest rate benefit a business?

  It allows the business to know in advance the cost of borrowing and monthly repayments.
• What is trade credit?

  A credit agreement with a supplier allowing a business to obtain raw materials and stock but pay for them later
• What must a business do to get a bank loan?


  Apply to a bank, which will carry out credit checks.
• What is a common term in a trade credit agreement regarding the maximum amount of credit?

  Credit limit
• What might a bank require if a business cannot repay a loan?


  The bank may require the business to secure its assets against the loan.
• What does the credit period in a trade credit agreement refer to?

  The length of time the business has to pay what is owed, usually 30, 60, or 90 days
• What happens if a business does not have enough assets to secure a loan?

  The bank may require a guarantor to repay the loan if the business does not make its repayments on time.
• How often is payment typically required in a trade credit agreement?

  Usually monthly
• What are the common methods of payment in a trade credit agreement?

  Bank transfer, cheque, or card payment
• What is a retrospective discount in the context of trade credit?

  A discount given when the business has purchased a certain amount of stock or raw materials