Question 1: Define 'internal sources of finance' and give two examples of such sources that a small business might use.

Answer: Internal sources of finance are funds generated within the business itself. Examples include retained profits and owner’s personal savings.

Question 2: Explain the main advantage of using bank overdrafts as a source of finance for a business.

Answer: Bank overdrafts provide quick access to extra funds, offering flexibility for short-term cash flow needs.

Question 3: Identify and describe two external sources of finance that a start-up business might consider when seeking funding.

Answer: Two external sources are: (1) Bank loans, which are borrowed sums that must be repaid with interest, and (2) Angel investors, who are wealthy individuals investing their personal money in exchange for a share of the business.

Question 4: Discuss one potential risk for a business when relying heavily on loans as a source of finance.

Answer: A potential risk is the burden of repaying the loans with interest, which can strain the business’s cash flow and profitability if revenue decreases.

Question 5: Describe what a venture capital firm does and how it differs from a bank loan.

Answer: A venture capital firm invests in high-growth potential businesses in exchange for equity. Unlike bank loans, they do not require repayment but take a share of ownership.

Question 6: Draw a simple diagram showing the flow of funds from a business seeking external finance through a bank loan. Label the key components involved.

Answer: A correct sketch would include: a business box, a bank, arrows indicating the business borrowing funds from the bank, and repayment with interest. Label the arrows 'Loan given' and 'Repayment with interest'.

Question 7: Explain the difference between equity and debt finance, providing one advantage of each.

Answer: Equity finance involves raising money by selling shares, providing ownership in the business. An advantage is that it does not need to be repaid. Debt finance involves borrowing money that must be repaid with interest, and its advantage is that it does not dilute ownership.

Question 8: Identify a situation in which a business might prefer to use crowdfunding as a source of finance. Justify your answer.

Answer: A business might prefer crowdfunding when launching a new product that appeals to a large community, as it provides funds and also helps test market demand without taking on debt or giving away ownership.

Question 9: Sketch a simple chart or diagram illustrating the relationship between a business and an external investor, such as an angel investor or venture capitalist.

Answer: A correct sketch would show a business icon connected by arrows to an investor icon (angel or venture capitalist), with labels indicating 'investment' and 'equity stake'.