Choosing Appropriate Sources of Finance Quiz

What is an example of an internal source of finance?

• Bank loan

• Retained profit

• Overdraft

• Trade credit

Answer explanation

Retained profit is an internal source of finance as it refers to the earnings that a company keeps after paying dividends. Unlike bank loans or overdrafts, it does not involve external borrowing.

Which of the following statements is TRUE about government grants?

• They need to be repaid

• They are always available

• They do not need to be repaid

• They are only for large businesses

Answer explanation

Government grants do not need to be repaid, making them a valuable source of funding for individuals and businesses. The other statements are incorrect as grants are not always available and are not limited to large businesses.

What is the primary disadvantage of using retained profit as a source of finance?

• It can upset shareholders

• It is not available immediately

• It requires repayment

• It is too expensive

Answer explanation

Using retained profit can upset shareholders if they prefer dividends over reinvestment. This dissatisfaction may lead to tensions, as shareholders might feel their immediate financial interests are being overlooked.

Which source of finance allows a business to buy now and pay later?

• Overdraft

• Trade credit

• Bank loan

• Hire purchase

Answer explanation

Trade credit allows businesses to purchase goods and services and defer payment, enabling them to buy now and pay later. This is distinct from other options like overdrafts or loans, which involve immediate repayment.

What is the main purpose of an overdraft?

• To save money

• To borrow money beyond the account balance

• To invest in assets

• To pay suppliers

Answer explanation

The main purpose of an overdraft is to borrow money beyond the account balance, allowing account holders to access additional funds when needed, rather than saving, investing, or paying suppliers.

If interest rates decrease, what is likely to happen to consumer spending?

• It will decrease

• It will remain the same

• It will increase

• It will fluctuate

Answer explanation

When interest rates decrease, borrowing becomes cheaper, encouraging consumers to spend more. This leads to an increase in consumer spending as people are more likely to take loans for big purchases.

What is a bank loan?

• Money borrowed without repayment

• An amount borrowed for a set time with a repayment schedule

• Money given by the government

• A type of trade credit

Answer explanation

A bank loan is defined as an amount borrowed for a set time with a repayment schedule, meaning the borrower agrees to pay back the loan in installments over a specified period.

Which source of finance would be best for a student starting a bakery with limited savings?

• Family & friends

• Bank loan

• Retained profit

• Overdraft

Answer explanation

Family and friends are often the best source of finance for a student with limited savings, as they may offer support without the strict repayment terms of a bank loan or the risks associated with overdrafts.

What is hire purchase?

• Buying items by paying an initial payment and installments

• Borrowing money from a bank

• Selling business assets

• Paying suppliers later

Answer explanation

Hire purchase is a method of buying items where the buyer makes an initial payment followed by installments. This allows individuals to acquire goods without paying the full price upfront.

For Pizza Hot to open a second shop, which source of finance is most suitable?

• Selling assets

• Mortgage

• Overdraft

• Trade credit

Answer explanation

A mortgage is suitable for Pizza Hot to finance a second shop as it allows for long-term borrowing against property, providing the necessary capital for expansion while spreading repayment over time.