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All 30 Flashcards — External sources of finance
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Question
What is a bank loan?
Answer
A bank loan is a fixed sum borrowed and repaid over an agreed period with interest.
💡 Hint
Fixed sum, fixed term.
Question
What is microfinance?
Answer
Microfinance provides small loans to entrepreneurs who cannot access traditional banking, often in developing countries.
💡 Hint
Small loans.
Question
Define external sources of finance.
Answer
External sources of finance are funds raised from outside the business, such as lenders, investors, or the government.
💡 Hint
From outside the business.
Question
Define trade credit.
Answer
Trade credit is when suppliers allow a business to buy now and pay later (e.g., 30–90 days).
💡 Hint
Buy now, pay later.
Question
External finance comes from ______ the business.
Answer
Outside.
💡 Hint
From lenders/investors.
Question
What is share capital as a source of finance?
Answer
Share capital is money raised by a limited company by selling shares (ownership) to investors.
💡 Hint
Sell ownership.
Question
Bank loans are suitable for large, ______ purchases.
Answer
Planned.
💡 Hint
Longer-term, fixed.
Question
State one advantage of a bank loan.
Answer
It provides a large lump sum for planned investment with a clear repayment schedule.
💡 Hint
Planned + predictable.
Question
What is the main advantage of external finance?
Answer
It can provide larger amounts of funding than internal sources, supporting major investment or rapid growth.
💡 Hint
Usually larger amounts.
Question
What is a business angel?
Answer
A business angel is a wealthy individual who invests their own money in a start-up in exchange for equity, often providing mentoring.
💡 Hint
Individual investor.
Question
State one advantage of share capital.
Answer
It raises permanent finance with no repayment and can provide large sums for expansion.
💡 Hint
No repayment.
Question
How does trade credit help a business?
Answer
It improves cash flow by delaying payments to suppliers, freeing cash for other short-term needs.
💡 Hint
Helps cash flow.
Question
State one advantage of a business angel.
Answer
They provide funding plus expertise, contacts and mentoring to help the start-up grow.
💡 Hint
Money + advice.
Question
State one disadvantage of external finance.
Answer
It has a cost (interest or sharing ownership) and can increase financial risk or reduce control.
💡 Hint
Cost or control.
Question
State one disadvantage of a bank loan.
Answer
Interest increases total cost and the business must repay even if sales fall; security may be required.
💡 Hint
Interest + repayments.
Question
State one disadvantage of share capital.
Answer
It dilutes ownership/control and shareholders may expect dividends and influence over decisions.
💡 Hint
Dilution.
Question
Define crowdfunding.
Answer
Crowdfunding is raising small amounts of money from many people, usually via online platforms.
💡 Hint
Many small investors.
Question
Overdrafts are best for short-term ______ flow gaps.
Answer
Cash.
💡 Hint
Flexible short-term.
Question
Selling shares raises permanent funds but dilutes ______.
Answer
Ownership.
💡 Hint
Control reduced.
Question
External sources can be divided into which two main types?
Answer
Debt finance (borrowing) and equity finance (selling shares/ownership).
💡 Hint
Debt vs equity.
Question
What is a bank overdraft?
Answer
An overdraft allows a business to withdraw more money than it has in its account up to an agreed limit.
💡 Hint
Flexible short-term.
Question
State one disadvantage of using a business angel.
Answer
The owner gives up equity and may face investor influence over decisions.
💡 Hint
Dilution + influence.
Question
Define venture capital.
Answer
Venture capital is finance invested by specialist firms into high-growth, high-risk businesses in exchange for equity.
💡 Hint
Equity + expertise.
Question
Define a government grant.
Answer
A government grant is funding from the government that does not need to be repaid, usually for a specific purpose and with conditions.
💡 Hint
Free but conditional.
Question
Exam skill: When recommending external finance, what must you always evaluate?
Answer
The advantages and disadvantages and how well the source matches the business context (purpose, amount, time period, control, risk).
💡 Hint
Link to context.
Question
State one disadvantage of grants or crowdfunding.
Answer
Grants are competitive and come with conditions; crowdfunding may fail to reach the target and can take time to run.
💡 Hint
Not guaranteed.
Question
Which type of external finance requires repayment with interest?
Answer
Debt finance, such as bank loans and overdrafts.
💡 Hint
Borrowed money.
Question
Why is an overdraft considered risky?
Answer
The bank can withdraw the facility at any time and interest rates are often higher than loans.
💡 Hint
Callable + high interest.
Question
Business angel vs venture capitalist: state one difference.
Answer
A business angel is an individual investing their own money; a venture capitalist is an investment firm investing pooled funds (often larger amounts).
💡 Hint
Individual vs firm.
Question
Why might venture capital be attractive beyond the money?
Answer
Venture capitalists often provide expertise, contacts and strategic guidance, helping the business grow.
💡 Hint
Money + support.
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Topic 3.2 hub
Sources of finance
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