1.3.4b Long-term sources of finance for a start-up or small business Quiz: Pearson Edexcel Business, Unit 3

The 20 questions

1. Which of these is a long-term source of finance?

   • A bank loan repaid over five years
   • Trade credit from a supplier paid after 30 days
   • Credit from a supplier paid after goods are sold
   • An overdraft agreed with the bank for cash shortages

2. What is venture capital?

   • Money given by the government to businesses that locate in a deprived region of the country
   • Money invested by an outside investor in return for a share of ownership in the business
   • A loan from a bank repaid with fixed monthly instalments over three years at a set rate
   • Profit reinvested in the business instead of being paid out to the owners as dividends

3. Which of these is a source of long-term finance that does NOT involve giving up ownership?

   • Crowdfunding that offers shares to supporters in exchange for money
   • Venture capital from an outside investor who takes shares
   • A bank loan repaid over several years with interest
   • Share capital from selling new shares to the public

4. Personal savings are a long-term source of finance because:

   • They must be repaid to the owner's family within a month, so they do not tie up cash for long
   • They are money the owner puts into the business and is not repaid in the short term
   • They are always borrowed from a bank at a variable interest rate that changes each month
   • They can only be used to pay suppliers on trade credit terms, not for any other business costs

5. A new café needs £60,000 to fit out its premises. Which long-term source is most suitable?

   • Trade credit from the coffee machine supplier paid after 30 days
   • Overdraft interest charged on the amount borrowed each day
   • A bank loan of £60,000 repaid over five years
   • A bank overdraft of £60,000 agreed for a single month

6. What is the main feature of share capital?

   • Money borrowed from a bank that must be repaid with interest each year
   • Money paid by customers in advance for goods not yet produced
   • Money raised by selling shares, giving shareholders a stake in ownership
   • Money kept back from profits for the owners' personal use only

7. Retained profit is best described as:

   • Profit borrowed from the bank against future sales of the business
   • Profit kept in the business and reinvested rather than paid out
   • Profit paid out to the owners as a dividend at the end of each year
   • Profit from a one-off sale of a building that the business no longer uses

8. Crowdfunding involves:

   • Selling a controlling stake in the business to a single wealthy investor
   • Raising small amounts of money from a large number of people, often online
   • Receiving money from a supplier that is repaid after the goods are sold
   • Borrowing a fixed amount from one large bank at a set rate of interest

9. A company wants to raise £500,000 for expansion and does not want to borrow. Which option could it use?

   • Use trade credit from its suppliers to pay for the expansion
   • Issue new shares to investors, which gives them a share of ownership
   • Take an overdraft that must be repaid within one month
   • Ask customers to pay in advance for goods that have not been produced

10. A business has £40,000 of retained profit and wants to fund a new delivery van costing £40,000. What is the main advantage of using retained profit?

    • It requires the business to take on a partner who will share all future profits equally
    • It has no cost to the business, as there is no interest and no need to share ownership
    • It must be repaid to the bank over ten years, with compound interest added each year
    • It can only be used by sole traders and not by limited companies at all, by law

11. Which is a disadvantage of raising finance through venture capital?

    • The investor requires the business to be repaid in full within one year of the deal
    • The business has to pay interest on the investment every month, regardless of its profits
    • The business cannot use the money for any purpose other than paying wages and rent
    • The investor takes a share of ownership and may want influence over decisions

12. What is the main disadvantage of a long-term bank loan?

    • Interest must be paid over the whole loan period, adding to total costs
    • It requires the business to give up control to the bank's directors
    • It can only be spent on stock and cannot be used for equipment or premises
    • It must be repaid in full the following month regardless of the business's cash position

13. Why might a business prefer to raise share capital rather than take a bank loan?

    • Share capital is always cheaper than any other source of finance in every possible situation
    • Share capital never has to be repaid and carries no interest charges, though ownership is shared
    • Share capital is only available to sole traders who do not want to share their profits
    • Share capital allows the owners to avoid paying corporation tax on any future profits made

14. Which long-term source of finance is most likely to be used by a small business with limited assets to offer as security?

    • A mortgage secured on a freehold property owned by the business
    • Venture capital, which requires an asset as security for the investment
    • Crowdfunding from supporters who each give small sums
    • Retained profit from the previous year, which needs no security at all

15. A business needs finance for five years to develop a product. Which source best matches this time period?

    • Crowdfunding with a deadline of one month to reach its target and no long-term commitment to backers
    • Trade credit, which must be paid within a few months of delivery and is not designed for product development
    • An overdraft, which is designed to be repaid within a few weeks and charges interest on the amount used
    • A long-term loan or share capital, which are repaid or retained for several years

16. A business gets a £20,000 bank loan at 8% interest over 2 years, repaid in equal total amounts. What is the total interest paid over the loan if simple interest is used?

    • £3,200
    • £4,000
    • £1,600
    • £8,000

17. Which of these is the most likely to be a disadvantage of issuing shares?

    • The business has to repay the share capital to shareholders within a single year of issue
    • Shares must be repaid with interest at the end of each financial year, like a loan does
    • Ownership is diluted, so existing owners share control and profits with new shareholders
    • The business loses the right to sell its products in its home market to overseas firms

18. A company says its finance mix is mainly retained profit and personal savings. What does this suggest about its funding?

    • It relies mainly on trade credit from suppliers, which will be paid after sales are made
    • It relies mainly on internal sources, so it has little need to borrow from outside
    • It relies mainly on overdrafts, which are repaid quickly out of its profits each month
    • It relies mainly on crowdfunding from a large number of small donors who pledge online

19. Why might a business choose a long-term bank loan over share capital?

    • It can avoid giving up ownership, though it must pay interest and repay the loan
    • It can avoid all costs because bank loans never charge any interest at all
    • It can ask the bank to share the profits and losses of the business equally
    • It can use the loan to pay shareholders dividends without any future repayment

20. Which of these is a disadvantage of crowdfunding?

    • It always raises more money than a bank loan of the same size, with no risk attached
    • It may fail to reach its target, and rewards promised to backers must still be delivered
    • It is usually free and carries no obligations to supporters whatever happens to the project
    • It requires the owner to put personal property up as security for the pledges made by backers

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