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Finance

Sources of finance

  • 3 things to know
  • Component 02

Overview

Why new and established businesses need finance, owners' capital, bank loans, overdrafts, trade credit, retained profit, sale of assets, new partners, share issues and crowdfunding.

What you need to know

Answer each one before you reveal it.

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Key term

Why do new and established businesses need finance?

Key term

Why does a business need finance when it is first set up?

Key term

Why might an established business need finance?

Questions from this subtopic

Each one with the model answer underneath.

  1. 1

    Why does a business need finance when it is first set up?

    Model answer

    A new business needs finance to buy premises, equipment and first stock before it has any sales. Finance also covers running costs until revenue comes in.

  2. 2

    Why might an established business need finance?

    Model answer

    An established business may need finance to fund expansion, such as a new branch or machinery. Finance can also pay for recruitment and marketing campaigns.

  3. 3

    Why does a business need finance to run from day to day?

    Model answer

    Wages, rent and suppliers must be paid, often before customers pay. Finance fills the gap between spending money and receiving it.

  4. 4

    What is owners' capital, and what are its limits?

    Model answer

    Owners' capital is money the owners put into the business from their own savings. Owners' capital carries no interest, but the owners may not have enough for a big project.

  5. 5

    What is a bank loan?

    Model answer

    A bank loan is a fixed sum borrowed from a bank and repaid, with interest, in instalments over an agreed period.

  6. 6

    When is a bank loan a suitable source of finance, and what are its drawbacks?

    Model answer

    A loan suits buying long-term assets such as machinery or a vehicle. Interest adds to costs, and the bank may demand security such as property.

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Customers may receive quality.
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AOwners may gain from higher profit.
BEmployees may lose jobs or face lower pay.
CCustomers may receive poorer quality.

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