methods of finance

Question 1

bank loan

pros and cons

Answer 1

 Loan = money borrowed that need to be paid back with interest
 Interest can be fixed or variable over a period of the loan
 Can be large amounts
 Time to repay
- Interest increases costs
- Risk of non-payment; collateral needed

Question 2

share capital

pros and cons

Answer 2

 Option for limited companies
 Sell more shares in the business to raise money
 No interest charges
 Can raise large amounts
- Give up a share of profit in form of dividends in the long term
- Only available to Ltd/Plc

Question 3

overdraft

pros and cons

Answer 3

 Bank allows a business to spend money they haven’t got
 Sends bank balance into negative figures
 Equal to short-term loan
 Interest charged if overdraft used
 Helps short-term cash flow problems
 The flexible way to fund working capital
- High-interest rates
- Can become dependent on it

Question 4

leasing

pros and cons

Answer 4

 Gain use of assets i.e. vehicles or machines without buying it
 Asset owner responsible for repairs, upkeep etc.
 For a set time period; an item can be upgraded
 No lump sum payment means cash stays in business; low opportunity cost
- Can end up paying more than if you bought it, can never own asset

Question 5

venture capital

pros and cons

Answer 5

 Money invested into the business by business angels/investment funds
 Done for a return; i.e. profit, the share of the business, a say in the running
 Can obtain large amounts
 Knowledge and expertise gained
- Loss of control/profits; loss of independence

Question 6

grants

pros and cons

Answer 6

 Given by EU/government or a charity
 Designed to support start-up/growth
 Used for specific reasons i.e. areas of high unemployment
 Doesn’t have to be paid back
 No loss of control of the business
- Competitive, hard to get
- Generally given for social, environmental or economic benefits

Question 7

trade credit

pros and cons

Answer 7

 A business buys something e.g. raw materials but is given time to pay for it
 Typically, 30 to 90 days
 Allows time to utilise it, and earn money from it to be able to pay it off
 Helps cash flow by keeping money in the business and be able to generate revenue
 Possible discounts for early repayment
- Only used for supplies
- Reputation can be damaged if payments are not made