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What is internal finance?
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What is internal finance?
Internal finance is funding that comes from inside the business.
What are the three main sources of internal finance?
The three main sources of internal finance are:
Owner's capital
Retained profit
Sale of assets
What is owner's capital?
Owner's capital is personal savings or other lump sums invested by a business owner.
True or False?
Retained profit is distributed to shareholders
False.
Retained profit is reinvested back into the business.
What is a sale and leaseback arrangement?
A sale and leaseback arrangement is when a business sells an asset, such as a building, for cash, then rents it back from the new owners.
Define the term retained profit.
Retained profit is profit generated in previous years that has not been distributed to owners and is reinvested back into the business.
True or False?
Internal finance often involves payment of interest.
False.
Internal finance is often free and does not involve payment of interest.
True or False?
Internal finance involves third parties who may want to influence business decisions.
False.
Internal finance comes from inside of the business and does not involve third parties.
True or False?
Owners may choose to invest more as the business grows or if there is a specific need, e.g. a short-term cash flow problem
True.
Owners may choose to invest more as the business grows or if there is a specific need, e.g. a short-term cash flow problem
What is the key opportunity cost of using internal finance?
The key opportunity cost of using internal finance is the inability to use the funds for other purposes once they have been invested in the business.
Define the term share capital.
Share capital is finance raised from the sale of shares in a limited company through flotation or a rights issue.
What is a secured loan?
A secured loan is a type of loan typically repaid over five to twenty years, where failure to make repayments can result in the business having to sell non-current assets.
Define the term overdraft.
An overdraft is an arrangement for a business to spend more money than it has in its bank account.
What is trade credit?
Trade credit is an agreement made with suppliers to buy raw materials, components or stock, which are then paid for at a later date.
What is leasing?
Leasing is when an asset is made available to a business in return for regular payments, without the business owning the asset.
What is crowdfunding?
Crowdfunding is a method of finance where businesses access funds provided by a large number of small investors on online platforms.
What are micro-finance providers?
Micro-finance providers are small lenders who make finance directly available to individuals or businesses who would be unable to access finance from anywhere else.
What are business angels?
Business angels are wealthy individuals who specialise in making investments in start-up or expanding businesses.
True or False?
Small and medium-sized businesses find most forms of external finance easy to access.
False.
Particularly in recent years, small and medium-sized businesses have found many sources of external finance trickier to access.
True or False?
Leasing is usually cheaper in the long run than buying an asset
False.
Leasing is usually more expensive in the long run than buying an asset.
What is a mortgage?
A mortgage is a long-term secured loan, typically used by a business to purchase buildings, land, or large items of capital equipment.
True or False?
Business angels tend to be more willing to take a risk than banks.
True.
Business angels tend to be more willing to take a risk than banks.
What is short-term finance used for?
Short-term finance is used to meet unexpected costs or to pay bills and suppliers, typically for amounts needed for less than a year.
What is long-term finance used for?
Long-term finance is used to purchase non-current assets such as buildings and other types of capital equipment, typically for large sums required for a significant period of time.
True or False?
Public limited companies can access fewer sources of finance than sole traders.
False.
Public limited companies have access to a wider selection of sources of finance than sole traders.
What is meant by the term flotation?
Flotation is the process of selling shares in public limited companies for the first time.
Define the term gearing.
Gearing refers to the level of debt a business has in relation to its equity.
What is the most appropriate type of lending to purchase land or property?
A mortgage is the most appropriate type of lending to purchase land or property.
True or False?
Overdrafts are best used for long-term capital requirements.
False.
Overdrafts are best used to cover short-term working capital needs.
What are variable interest rates?
Variable interest rates can be increased or decreased during the borrowing term.
True or False?
Trade credit is an example of a long-term source of finance.
False.
Trade credit is an example of a short-term source of finance.
What is a credit score?
A credit score is the assessment of a borrower that determines whether they are approved for credit, such as loans.