1/ Explain two circumstances in which a business may need to raise capital.

​[5]
- When it is first established: at this stage a business will require capital to
purchase the resources necessary for production. Premises, equipment,
inventories and vehicles are all examples of these resources. It is also likely
to require capital to invest in marketing to create a customer base.
- If it is expanding: at this stage a business may require capital to invest in
marketing its new products or marketing in new markets. It may also require
additional physical assets to supply an increased volume of goods or
services.
2
a/ Distinguish between loan capital and share capital. [3]
Share capital is the money invested into a company by shareholders when they
buy shares. Loan capital is money invested by a business as a result of borrowing.
Businesses have to pay interest on the latter; they have more flexibility about
making payments to shareholders.
b Define the term working capital.​[2]
Working capital is the cash a business has for its day-to-day spending.
3
a Distinguish between revenue company in the UK to raise capital by selling
shares.​[3]
In the UK, it is much easier for public limited companies to sell shares for the
following reasons:
• They can sell shares on the Stock Exchange. This is an efficient international
market which brings together buyers and sellers of shares and sets share prices.
• Unlike private limited companies, public companies do not need the permission
of other shareholders to sell shares. Equally, existing shareholders can sell their
shares freely.
4
a/ List three external sources of finance available to a business.​[3]
External sources of finance include:
● overdrafts
● bank loans
● mortgages
● venture capital
● share (or equity) capital
● government grants and loans
● taking on new partners
● debentures.
b/ Describe a debenture.​[2]
Debentures are a special type of long-term loan to be repaid at some future date, normally
within 15 years of the loan being agreed. In some circumstances, debentures may not
have a repayment date. The rate of interest paid on debentures is fixed. Debentures are
normally secured by using the business’s non- current assets as collateral.
5 Explain, with examples, the difference between short-term and long-term sources
of finance.​[5]
Short-term sources of finance are needed for a limited period of time, normally less than
one year. Examples are working capital and overdrafts.

Long-term sources of finance are those that are needed over a longer period of time,
usually over a year.
Retained profits and venture capital are commonly used, long-term sources of capital.
6
a/ Describe what is meant by the term venture capital.​[2]
Venture capital is funds advanced to businesses thought to be relatively high risk, in the
form of share and loan capital. Financial institutions, for example merchant banks,
provide venture capital as well as wealthy individuals (known as business
angels). It is an important source of finance for small- to medium-sized businesses which
are considered to be risky and therefore in some danger of failing.
b/ Outline one advantage and one disadvantage to a business of using venture
capital as a source of finance.​[3]
An advantage is that venture capital investors provide not only capital, but experience,
contacts and advice when required; this distinguishes venture capital from other sources
of finance.
A significant disadvantage of using venture capital is that its providers will not advance
huge amounts to businesses. It is unusual for venture capitalists to lend in excess of $850
000 in a single deal.
7
a/ Define the term government grant.​[2]
A government grant is a sum of money given to entrepreneurs or businesses for a specific
purpose.
b/ Explain why it is easier for a public limited company in the UK to raise capital by
selling shares.​[3]
In the UK, it is much easier for public limited companies to sell shares for the following
reasons:
• They can sell shares on the Stock Exchange. This is an efficient international market
which brings together buyers and sellers of shares and sets share prices.
• Unlike private limited companies, public companies do not need the permission of other
shareholders to sell shares. Equally, existing shareholders can sell their shares freely.
8
a/ List two sources of finance that may be available to a partnership.​[2]
A partnership may raise capital from a range of sources, including the following:
● retained profits
● bank loans
● venture capital
● government grants
● mortgages.
b/ Explain why a partnership may experience difficulties in raising large sums of
finance.​[3]
A partnership cannot raise capital by selling shares and therefore may be more dependent
on loan capital. Banks may be unwilling to lend money if they consider the business to
represent a high risk.
Partners may not have sufficient assets to raise substantial sums of capital and the
absence of limited liability may deter some investors.
9
a/ Distinguish between an overdraft and a bank loan. [3]
An overdraft exists when a business is allowed to spend more than it holds in its current
bank account up to an agreed limit.
A bank loan is an amount of money provided to a business for a stated purpose in return
for a payment in the form of interest charges.
b/ Explain one disadvantage to a business of using an overdraft as a source of
finance.​[2]
A bank can request the repayment of a bank loan at very short notice. This may lead to
the business in question suffering a cash-flow crisis. Overdrafts can be an expensive form
of capital for a business,
especially for smaller businesses which are judged to be high risk.
10 Explain the advantages and disadvantages to companies of raising capital by
selling shares.​[5]
A major advantage for businesses from the selling of shares is that although the company
may be expected to pay an annual return to shareholders (dividends)
the level of this payment is not fixed and, in an unprofitable year, it may be possible for
the company to avoid making any payment. However, the existing shareholders of a
business may lose control if too many shares are sold, giving effective control to others.
This can be a particular problem for smaller, private companies.