Business Sources of Finance

Short-term, external source of finance.

Bank Overdraft - It allows the individual to continue withdrawing money even if the account has no funds in it or not enough to cover the withdrawal.

Advantages.

+ The business can use the bank's money whenever they need to.

+ It is quick and convenient.

Disadvantages.

- The bank will set an overdraft limit which the business must not exceed.

- You may have to pay a fee for the overdraft.

It is suitable when the business goes innto debts and when they need money as soon as possible.

Long-term, external source of finance.

Government Grants - It is a financial award given by the federal, state or local government to an eligible grantee.

Advantages.

+ The type of loan doesn't require any interest in return once you have the money.

Disadvantages.

- This source of finance has a long and complex process of purchasing.

- It requires a lot of paper work.

- Sometimes it depends on the business's financial circumstances.

It is a suitable way of starting up a business in an area with a high level of unemployment.

Medium/Long-term, external source of finance.

Bank Loans - is the most common form of loan capital for a business.

Advantages.

+ Can get large loans.

+ Can repay over longer period which makes them quite good value.

Disadvantages.

- Mortgages are normally 'secured on' or guaranteed by a property.

- If repayments aren't kept up, the bank may take away the business.

It is suitable when you need a large loan - e.g. to buy premises for your business. Medium term to convert persistant overdraft.

Short-term, internal source of finance.

Owner's Capital - It is the equity account, which shows how much of the company assets are owned by the owners instead of creditors.

Advantages.

+ It's your own money, do whatever you want with it.

+ You do not have to pay interest.

Disadvantages.

- All your savings are in the business.

It is suitable to set up business and its need.

Long-term, internal source of finance.

Retained Profit - It is the profit kept in the businessrather than paid out to shareholders as a dividend.

Advantages.

+ Cheap way to invest money.

+ No interest rates.

+ It is convenient.

+ No administration costs.

Disadvantages.

- Opportunity cost e.g. money could have been given back to owners.

It is suitable when buying new fixed assets. It helps fund expansion. It helps a business get through bad times e.g. recession.

Long-term, internal source of finance.

Selling Assets - is a non-recourse cash sale of assets from a bank or government agency to a third party.

Advantages.

+ There is no interest to pay.

+ Get rid of unwanted assets.

Disadvantages.

- Once sold, can't get the assets back.

It is suitable when they want to raise money quickly for the business.

Long-term, external source of finance.

Shares - one of the equal parts into which a business's capital is divided, entitling the holder to a proportion of the profits.

Advantages.

+ It is a cheap and easy way to issue shares.

Disadvantages.

- Established companies might decide to issue more share in the future to raise additional money (shareholders).

It is suitable when shares are issued to help set up the business.

Short-term, external source of finance.

Advantages.

+ Not in debt for a long period of time.

Disadvantages.

- Have to pay the money back.

- Have to pay interests.

- Could lose business if money not paid back on time.

It is suitable when you have just opened up a business and need money to start up, or when you have a short term cash flow crisis.

Short-term, external source of finance.

Trade Credit - It is the credit extended to you by suppliers who let you buy now and pay later.

Advantages.

+ It is cheap.

Disadvantages.

- May lose discounts a supplier would give them for paying on time.

It is suitable when the business needs a short-term source of finance to get through a difficult month.

Short/Medium-term, external source of finance.

Hire Purchase - It is a system by which one pays for a thing in regular instalments while having the use of it.

Advantages.

+ Spread out cost over number of years - with regular monthly payments.

Disadvantages.

- Can include high interest.

- Items isn't yours unil end of agreement.

It is suitable when the business needs large capital items e.g. a delivery van.

Medium-term, external source of finance.

Leasing - renting (e.g. equipment, premises). 

Advantages.

+ Pay instalments over a set period of time.

+ Maintenance done by the firm lending.

Disadvantages.

- The business doesn't actually own the item.

It is suitable when buying large capital items, technology etc.

Long-term, external source of finance.

Venture Capital - It is capital invested in a project in which there is a substantial element of risk, typically a new or expanding business.

Advantages.

+ Get money then invest money in the business.

Disadvantages.

- Risk their money in hope of higher return.

- Interference in the running of the business.

It is suitable when expanding and developing the business.

Long-term, external source of finance.

Debenture - A debenture is a form of bond or long-term loan which is issued by the company.

Advantages.

+ May pay cheaper interest.

+ Wider range of lenders.

Disadvantages.

- Must pay back capital with interest payments.

It is suitable as an alternative to share issues for PLCs.