Question 1

Define 'start-up capital' and give an example of how it's used.

Accepted Answer

Start-up capital is the initial funding required to launch a new business. This finance covers costs like purchasing equipment, renting premises, and initial marketing efforts. For example, funds used to buy ovens and ingredients for a new bakery would be start-up capital.

Question 2

Explain the difference between internal and external sources of finance, giving an example of each.

Accepted Answer

Internal finance comes from within the business, such as retained profits used to buy new equipment. External finance is sourced from outside the business, for instance, a bank loan taken to expand operations.

Question 3

What are 'retained profits,' and how can they be used as a source of finance?

Accepted Answer

Retained profits are the profits a business keeps after paying taxes and dividends. They can be reinvested in the business for expansion, research and development, or to purchase new assets, providing a cost-effective source of finance.

Question 4

Describe 'sale of assets' as a source of finance. Give one advantage and one disadvantage.

Accepted Answer

Selling assets involves selling possessions of the business to raise capital. An advantage is that it can quickly generate cash. A disadvantage is that the business loses the use of the asset, potentially impacting productivity.

Question 5

What is a 'bank overdraft,' and when might a business use it?

Accepted Answer

A bank overdraft allows a business to withdraw more money than it has in its account, up to an agreed limit. Businesses often use overdrafts to cover short-term cash flow problems or unexpected expenses, like delayed payments from customers.

Question 6

Explain 'trade credit' and how it benefits a business's cash flow.

Accepted Answer

Trade credit allows a business to buy goods or services from a supplier and pay for them later, usually within 30-90 days. This improves cash flow by delaying payments and giving the business time to generate revenue from the purchased items before needing to pay for them.

Question 7

What is 'share capital,' and how do companies obtain it?

Accepted Answer

Share capital is the money raised by a company through selling shares to investors. Companies obtain it by issuing new shares on the stock market (for public limited companies) or privately to investors (for private limited companies).

Question 8

Describe 'venture capital' and the type of businesses that typically use it.

Accepted Answer

Venture capital is funding provided to start-up companies and small businesses with high growth potential. These businesses often operate in industries such as technology, biotechnology, or other innovative fields, and seek venture capital for rapid expansion.

Question 9

Explain the difference between short-term and long-term finance, providing an example of each.

Accepted Answer

Short-term finance is used for immediate needs and is typically repaid within a year, like a bank overdraft for managing working capital. Long-term finance is used for investments like purchasing buildings and is repaid over several years, such as a mortgage.

Question 10

What is 'crowdfunding,' and what are some of the potential benefits and drawbacks for a business?

Accepted Answer

Crowdfunding involves raising finance by collecting small amounts of money from a large number of people, typically online. A benefit is access to a wide range of investors, while a drawback can be the need to publicly disclose business plans.

Business finance: needs and sources

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