Source of Finance - Year 1 A-level

Which source of finance is not a long-term source of finance?

• Share capital

• Commercial mortgage

• Overdraft

• Bank loan

Which is a valid disadvantage of a business raising share capital from new shareholders?

• Interest will need to paid

• Control and ownership will be diluted

• It can leave the business unable to meet expenses due to having to pay dividends

• It has to be repaid at a moment's notice

Interest on loans and overdrafts reduces (a)  

A commercial mortgage is a good source of finance when buying a property for all the reasons below, except which one...

• Mortgage repayments can increase when interest rates rise

• The building itself is offered as security, no other assets need to be offered

• Interest tends to be low

• Repayments on a mortgage are fairly certain allowing cashflow planning

Which is a valid advantage of an overdraft?

• It can be relied on as a long-term source of finance

• Large amounts can be borrowed, so is good for buying significant assets

• It can be recalled at short notice

• It is highly flexible with no repayments and interest only paid when used

Which of the following advantages and disadvantages doesn't apply to trade credit?

• It is interest free finance

• It requires a strong track record of paying suppliers

• It is usually available to new businesses

• It may mean that the business loses prompt payment discounts

Why is raising long-term finance through issuing shares more preferable to taking a bank loan?

• Because debts have to be repaid, whereas dividends are only paid if the business has cash available

• Because issuing new shares means a business owner keeps control of the business

• Because a bank loan can't be used as a long-term source of finance

• Because share capital is easy to obtain, even if your business is performing poorly

Debt factoring allows a business to....

• Receive cash from their customers quicker

• Receive cash for its receivables earlier than customers pay

• Receive all of their sales revenue early

• Pay its suppliers later

A valid disadvantage of leasing equipment is....

• It is cheaper in the long-run than buying the asset outright

• The equipment may be out of date by the time you own the asset

• It is more expensive in the long-run than buying the asset outright

• Payments are irregular making cashflow forecasting difficult

Working capital can be used as a short-term internal source of finance. Which is a way of releasing cash from working capital?

• Holding more stock

• Arranging to pay suppliers quicker

• Giving customers longer to pay

• Arranging to pay suppliers later