Theme 2 re-cap x2

What is a potential advantage of obtaining a loan from family or friends?

• It requires a lengthy application process.

• It may not need to be paid back.

• It guarantees business success.

• It always comes with high interest rates.

Answer explanation

A potential advantage of obtaining a loan from family or friends is that it may not need to be paid back, unlike traditional loans which typically require repayment with interest.

Which of the following is a disadvantage of applying for a grant?

• It requires giving up equity in the business.

• It needs to be paid back with interest.

• It is time-consuming to apply and complete paperwork.

• It is only available to public companies.

Answer explanation

The correct choice highlights that applying for a grant can be time-consuming due to extensive paperwork, which is a significant disadvantage. The other options do not accurately describe grant applications.

What is a disadvantage of venture capital?

• It does not require any return on investment.

• It is only available to government organizations.

• Venture capitalists may want a share of the business.

• It is only available for non-risky investments.

Answer explanation

A disadvantage of venture capital is that venture capitalists often seek equity in the business, meaning they want a share of ownership, which can dilute the original owners' control and profits.

What is an advantage of a bank loan?

• There will be little or no interest

• You can pay in smaller installments

• They are quick and easy to arrange

• You don't have to pay it back

Answer explanation

An advantage of a bank loan is that you can pay in smaller installments, making it more manageable for borrowers to repay over time compared to larger lump-sum payments.

What is an advantage of an overdraft?

• There is never interest

• You can pay in smaller installments

• Useful for relatively small sums and short term finance

• You don't have to pay it back

Answer explanation

An overdraft is particularly useful for managing relatively small sums and short-term finance needs, allowing flexibility in cash flow without the need for a formal loan.

What is an advantage of a business using owner's savings as a source of finance?

• Very low rate of interest

• It will bring new skills to the business

• It doesn't need repaying

• Repayment is always spread over a period time

Answer explanation

Using owner's savings as a source of finance means there is no obligation to repay the funds, unlike loans. This provides financial flexibility and reduces the burden of debt on the business.

Which of the following best describes the term limited liability? If the business fails:

• Personal possessions of the owner can be taken to pay any debts

• The owner is personally liable for all the debts of the business

• There is no limit on the amount the owner has to pay to settle debts

• The owner only loses the amount invested in the business

Answer explanation

Limited liability means that if the business fails, the owner only loses the amount invested in the business, protecting personal assets from being used to pay business debts.

Which type of legal structure is used when two or more people join together to start a business and have unlimited liability?

• Sole trader

• Partnership

• LTD

• PLC

Answer explanation

A partnership is a legal structure where two or more individuals collaborate to run a business, sharing profits and responsibilities. In a partnership, all partners have unlimited liability, meaning they are personally responsible for business debts.

What are the owners of private and public limited companies called?

• Stakeholders

• Managers

• Board of directors

• Shareholders

Answer explanation

The owners of private and public limited companies are called shareholders. They hold shares in the company, representing their ownership stake, unlike managers or the board of directors who manage the company.

A private limited company may change into a public limited company because it wants:

• Limited liability

• To raise additional finance

• Unlimited liability

• To avoid takeover

Answer explanation

A private limited company may change to a public limited company primarily to raise additional finance by issuing shares to the public, which is not possible as a private entity.