Question 1: Define 'internal finance' and give one example of how a business might use it.

Answer: Internal finance is money generated within the business, such as retained profits, which can be reinvested into the business.

Question 2: List two advantages of using bank loans as a source of finance.

Answer: Advantages include fixed repayment terms and access to a large sum of money; it also allows the business to maintain ownership.

Question 3: Identify and explain one potential disadvantage of issuing shares to raise finance.

Answer: A potential disadvantage is that issuing shares dilutes ownership and control of the business among more shareholders.

Question 4: Describe a scenario in which a startup might prefer to use crowdfunding to raise finance.

Answer: A startup with a strong community or innovative product might use crowdfunding to generate funds while also gaining market interest and publicity.

Question 5: Explain the difference between debt finance and equity finance.

Answer: Debt finance involves borrowing money that must be repaid with interest, such as loans or bonds. Equity finance involves selling shares of the business to raise funds, which does not require repayment but dilutes ownership.

Question 6: Sketch a simple diagram showing a business obtaining finance through a bank loan. Label the components clearly.

Answer: A correct sketch should include a business entity, a bank, and an arrow indicating capital moving from the bank to the business, with labels for 'Bank' and 'Loan Capital'.

Question 7: Identify one source of finance that is suitable for a business planning to expand quickly and explain why.

Answer: Bank overdraft; it provides quick access to extra funds for expansion, although it must be repaid quickly and can incur high interest.

Question 8: Draw a flowchart illustrating how retained profits can be used as a source of finance within a business.

Answer: A flowchart starting with 'Retained Profits' leading to 'Reinvestment into Business Operations', possibly branching into areas like 'Marketing', 'Equipment', or 'Research and Development'.

Question 9: Evaluate the potential risks of a small business relying heavily on personal savings as its main source of finance.

Answer: Risks include limited funds, which may restrict growth, and personal financial loss if the business fails, putting the owner's personal assets at risk.

Question 10: Describe how a business might use trade credit as a source of finance, including one advantage.

Answer: A business can delay payments to suppliers for goods or services, which helps with cash flow management. An advantage is that it provides short-term finance without immediate cash outflow.