Question 1: Define the term 'overdraft' as a source of finance and explain one advantage of using it for a business.

Answer: An overdraft is a facility that allows a business to withdraw more money than it has in its bank account up to an agreed limit. One advantage is that it provides quick access to short-term funds, helping to cover cash flow shortages.

Question 2: Identify two short-term sources of finance a new business might use and explain why they are suitable.

Answer: Two short-term sources are trade credit and bank overdrafts. Trade credit is suitable because it allows the business to buy goods and pay later, improving cash flow. Bank overdrafts are suitable because they provide quick access to funds to cover immediate expenses.

Question 3: A business owner wants to expand their company but does not want to borrow money. Describe two alternative sources of finance they could consider and briefly explain each.

Answer: They could consider issuing shares to investors, which provides capital without repayment obligations, or using retained profits from previous years, which involves reinvesting profits back into the business.

Question 4: Explain what is meant by 'venture capital' and identify one potential risk for a business seeking venture capital funding.

Answer: Venture capital is funding provided by investors to start-up or small businesses with high growth potential in exchange for equity. A risk is that the investors may take control of the business or force it to pursue strategies that do not align with the owner’s vision.

Question 5: Describe the process a business might follow to raise funds through a share issue.

Answer: The business would first decide the number of shares to issue and at what price. It would then register the issue with the relevant authorities, promote the share offering to potential investors, and finally sell the shares on the stock market or through private arrangements.

Question 6: Draw a simple diagram to illustrate the difference between short-term and long-term sources of finance. Label each part clearly.

Answer: A correct sketch would show two sections: one labeled 'Short-term sources' including trade credit, overdraft, and factoring; the other labeled 'Long-term sources' including loans, share capital, and retained profits. Arrows or lines should clearly connect the sources to their respective categories.

Question 7: Identify one government scheme that provides finance to small businesses in the UK and outline its main purpose.

Answer: The Start Up Loans scheme provides loans and mentoring support to new small businesses to help them start and grow.

Question 8: Evaluate the advantages and disadvantages of using retained profits as a source of finance.

Answer: Advantages include that it is a cheap source of finance as it does not involve interest or giving up ownership, and it shows the business is profitable. Disadvantages are that it limits the funds available for other investments and may slow down growth if profits are insufficient.