Sources Of Finance
Overview
A printer in Chittagong needs 900,000 taka for a new press that will last eight years. His bank offers an overdraft on the spot and a term loan in three weeks. He takes the overdraft because he needs the press now. Fourteen months later the bank asks for the overdraft back, as it is entitled to do at any time, and he has to sell the press at a loss to repay it. The press was a good decision. The money used to buy it was the wrong money.
This lesson is about choosing the right money. You will learn the internal and external sources the specification names, from retained profit and selling unwanted assets through loans, overdrafts, trade credit, share issues, crowdfunding and grants, and what each one costs beyond its interest rate. You will learn the single rule that prevents most financing disasters, which is to match how long you need the money for to how long the source lasts, and you will practise judging which source suits a new business and which suits an established one. Finance questions are where the 12-mark Recommend items live, so this is a topic worth being fluent in.
Objectives
- Methods businesses use to raise finance.
- Appropriateness of sources of finance.
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Flashcards
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Lesson Note
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Lesson Evaluation
Congratulations on completing the lesson on Sources Of Finance. Now that youve explored the key concepts and ideas, its time to put your knowledge to the test. This section offers a variety of practice questions designed to reinforce your understanding and help you gauge your grasp of the material.
You will encounter a mix of question types, including multiple-choice questions, short answer questions, and essay questions. Each question is thoughtfully crafted to assess different aspects of your knowledge and critical thinking skills.
Use this evaluation section as an opportunity to reinforce your understanding of the topic and to identify any areas where you may need additional study. Don't be discouraged by any challenges you encounter; instead, view them as opportunities for growth and improvement.
- Which one of the following is an internal source of finance? A. A bank overdraft B. Retained profit C. Trade credit D. A government grant Answer: B
- Which source of finance is repayable on demand and therefore unsuitable for buying long-lived machinery? A. A mortgage B. A bank loan C. An overdraft D. Retained profit Answer: C
- A business borrows 250,000 dollars at 9 per cent a year, charged on the full amount borrowed. How much interest does it pay in one year? A. 2,250 dollars B. 22,500 dollars C. 27,750 dollars D. 225,000 dollars Answer: B
- Which one of the following can NOT issue shares to raise finance? A. A public limited company B. A private limited company C. A sole trader D. A company listed on a stock exchange Answer: C
- Which one of the following is a drawback of raising finance through a new share issue? A. Interest must be paid every year B. The money must be repaid within five years C. Existing owners give up part of the ownership and control D. Security has to be provided to the lender Answer: C
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Recommended Books
Further learning from open sources
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Textbook section
Obtaining Short-Term Financing
What are the main sources and costs of unsecured and secured short-term financing?
"Introduction to Business: Obtaining Short-Term Financing" by OpenStax, OpenStax, Rice University, licensed under CC BY 4.0 (https://creativecommons.org/licenses/by/4.0/). Source: https://openstax.org/books/introduction-business/pages/16-3-obtaining-short-term-financing. Access for free at https://openstax.org/books/introduction-business/pages/1-introduction
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Textbook section
Securities Markets
How do securities markets help firms raise funding, and what securities trade in the capital markets?
"Introduction to Business: Securities Markets" by OpenStax, OpenStax, Rice University, licensed under CC BY 4.0 (https://creativecommons.org/licenses/by/4.0/). Source: https://openstax.org/books/introduction-business/pages/16-6-securities-markets. Access for free at https://openstax.org/books/introduction-business/pages/1-introduction
Published by other organisations under open licences, credited as they ask. Links open their websites.
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