Question 1: Define 'internal finance' and give two examples of its sources within a business.

Answer: Internal finance is funding generated within the business itself. Examples include retained profits and the sale of assets.

Question 2: Explain the main difference between short-term and long-term sources of finance.

Answer: Short-term finance is used for immediate needs and is typically repaid within a year, such as overdrafts or trade credit. Long-term finance is used for significant investments and is repaid over several years, such as loans or issuing shares.

Question 3: Identify two external sources of finance that a new business might use to start operations and explain their advantages.

Answer: Bank loans and venture capital are external sources. Bank loans provide a lump sum with fixed repayments, offering control over funds. Venture capital provides funding in exchange for equity and can bring valuable expertise.

Question 4: Describe what is meant by 'overdraft' and discuss one advantage and one disadvantage of using it as a source of finance.

Answer: An overdraft allows a business to withdraw more money than available in its bank account up to a certain limit. Advantage: flexible and quick access to funds. Disadvantage: high interest rates and potential for debt build-up.

Question 5: Sketch a simple diagram showing the flow of funds from a business issuing shares to investors. Label the main components.

Answer: A correct sketch would include a box labeled 'Business', an arrow pointing to 'Investors' with the label 'Shares issued', and a corresponding arrow back to 'Business' labeled 'Funds received'.

Question 6: List three factors a business should consider when choosing a source of finance.

Answer: Cost of finance, repayment terms, and the impact on ownership/control.

Question 7: Explain how issuing shares can be a source of finance for a business. Mention one benefit and one potential drawback.

Answer: Issuing shares provides capital by selling ownership stakes to investors. Benefit: no repayment obligation. Drawback: dilution of ownership and potential loss of control.

Question 8: Imagine a business needs urgent short-term finance to cover unexpected expenses. Suggest one suitable source of finance and justify your choice.

Answer: An overdraft would be suitable because it provides quick access to funds and flexible repayment options for urgent needs.

Question 9: Describe what a business must do to secure a bank loan. Include at least two steps in your answer.

Answer: The business must prepare a detailed loan application including financial statements and a repayment plan, and it may also need to provide collateral or security to the bank.

Question 10: Sketch a simple diagram illustrating the difference between retained profits and external funding sources. Label each part clearly.

Answer: A correct sketch would include two sections: one labeled 'Retained Profits' with an arrow pointing from the business to itself, indicating reinvestment; the other labeled 'External Funding' with arrows from external sources like banks or investors to the business.