Advantages and disadvantages of sources of finance

Question 1

What are the advantages of using owners capital ?

Answer 1

1. There is no interest or additional costs
2. Flexibility in how quick it is repaid

Question 2

What are the disadvantages of using owners capital ?

Answer 2

1. Owner may not have enough money to finance the business
2. If business fails, all finance is lost

Question 3

What are the advantages of retained profits ?

Answer 3

1. Cheap - no repayments or interest
2. Flexibility to decide how much is used and when

Question 4

What are the disadvantages of retained profits ?

Answer 4

1. Opportunity cost - owners/shareholders may want it as their income
2. May cause disagreements

Question 5

What are the advantages of selling assets ?

Answer 5

1. Cash raised
2. No more costs in maintaining asset

Question 6

What are the disadvantages of selling assets ?

Answer 6

1. Business may not have surplus assets to sell
2. Slow process

Question 7

What are the advantages of a bank loan ?

Answer 7

1. Repayments can be spread over a period of time - less impact on cash flow
2. Both enter loan agreement knowing exact details

Question 8

What are the disadvantages of a bank loan ?

Answer 8

1. Requires proof that business will repay debt
2. Has to be repaid with interest
3. Not guaranteed if at risk

Question 9

What are the advantages of peer to peer funding ?

Answer 9

Interest rates lower than the banks offer

Question 10

What are the disadvantages of peer to peer funding ?

Answer 10

Difficult - lenders careful about who they lend to

Question 11

What are the advantages of crowd funding ?

Answer 11

1. Smaller investors are more likely to take risks
2. Owner retains full control

Question 12

What are the disadvantages of crowd funding ?

Answer 12

1. Effective marketing
2. If project fails, may damage reputation
3. Competitive
4. Ideas can be stolen

Question 13

What are the advantages of share capital ?

Answer 13

No additional costs attached to it

Question 14

What are the disadvantages of share capital ?

Answer 14

1. Expensive
2. Has to give away some of company to investors
3. Future profits shared

Question 15

What are the advantages of venture capital ?

Answer 15

1. Money is available quickly
2. May provide expertise to help make investment successful

Question 16

What are the disadvantages of venture capital ?

Answer 16

1. Lose proportion of ownership
2. Some profits lost to investor

Question 17

What are the advantages of an overdraft ?

Answer 17

1. Used to cover short term debts
2. No charge for clearing balance early
3. Business only pays interest when overdrawn

Question 18

What are the disadvantages of an overdraft ?

Answer 18

1. Bank may ask for repayment at any time
2. High level of interest

Question 19

What are the advantages of leasing ?

Answer 19

Business can pay small amount of money in the short term for an asset

Question 20

What are the disadvantages of leasing ?

Answer 20

Business does not own the asset, so has to continue paying monthly

Question 21

What are the advantages of trade credit ?

Answer 21

1. Business does not have to pay straight away
2. Easy to set up
3. Business can continue making profit
4. Cheap

Question 22

What are the disadvantages of trade credit ?

Answer 22

1. Costs business to administer payments
2. Can only be used for goods supplied
3. May lose good suppliers if fail to pay

Question 23

What are the advantages of debt factoring ?

Answer 23

1. Quick method of raising money
2. Enhances cash flow

Question 24

What are the disadvantages of debt factoring ?

Answer 24

1. Debts are usually sold for less than amount outstanding
2. Does not make as much profit

Question 25

What are the advantages of grants ?

Answer 25

Business does not have to pay any money back

Question 26

What are the disadvantages of grants ?

Answer 26

1. Hard to obtain
2. Very competitive