3.2 Sources of finance: Practice Questions

Which source of finance is most likely to be used by a sole trader who wants to maintain full control of the business without incurring debt or interest charges?

How does debt factoring primarily assist a business that suffers from long credit periods offered to its customers and needs to improve its immediate working capital?

A high-growth FinTech startup is seeking \( \$2 \) million in funding. They have been approached by a venture capital firm and a business angel. Which of the following best describes the likely difference between these two sources in terms of their investment profile?

A large public limited company (PLC) intends to finance a major long-term expansion project. The directors wish to raise significant funds without incurring fixed interest charges or the obligation to repay the principal by a set date. Which source of finance is most suitable?

A business experiences a temporary liquidity crisis due to a seasonal drop in sales but expects a recovery within three months. Which short-term external source of finance offers the most flexibility to manage fluctuating daily cash requirements without a fixed repayment schedule?

Explain the primary difference between overdrafts and trade credit as short-term sources of finance for a small retail business.

A company currently has a high gearing ratio of \(75\%\). Evaluate why issuing new share capital would be a more suitable source of finance for expansion than issuing debentures.

Identify and explain two internal sources of finance that a business might use to fund the purchase of a new delivery vehicle.

EcoClean Services is a small residential cleaning business. The owner needs to raise \( \$1,500 \) to upgrade their vacuum cleaners. The owner is considering using the business's retained profits or selling an old delivery van that is no longer used.

(a) Define the term internal source of finance. [1]
(b) Identify two examples of internal sources of finance mentioned in the text. [2]
(c) Explain one advantage for EcoClean Services of using an internal source of finance instead of taking out a bank loan. [2]

Artisan Woods is a successful medium-sized private limited company that manufactures high-end bespoke furniture. To meet increasing demand from international hotels, the company needs to invest \( £500,000 \) in a new automated production facility. The owners are considering two options: seeking investment from a venture capitalist or taking out a long-term bank loan.

(a) Explain two internal sources of finance that Artisan Woods could have used before seeking external funding. [2]
(b) Analyze two advantages for Artisan Woods of choosing a venture capitalist over a traditional bank loan. [3]