Sources of Finance Flashcards
Advantages of debt factoring as a source of finance.
Receivables (amounts owed by customers) are turned into cash quickly!
Business can focus on selling rather than collecting debts
The facility is practically limitless and therefore suits a fast-growing business.
There is no security required – unlike a loan or overdraft.
Disadvantages of debt factoring as a source of finance
Quite a high cost – the charge made by the factoring company, typically around 3%
Customers may feel their relationship with the business has changed
Advantages of using retained profit as a source of finance
No interest charges
Available immediately
Avoids debt
No loss of ownership
Disadvantages of using retained profit as a source of finance
Amount available may be limited
Could cause shareholder dissatisfaction as dividend payment would be reduced
Once used it cannot be used for other purposes
Advantages of using owner’s capital as a source of finance.
No interest payments
No repayment schedule
No loss of ownership
Disadvantages of using owner’s capital as a source of finance.
Limited amount available
Personal finances are at risk
Could cause friction between owners if all are not able to contribute the same amount
Advantages of using loans as a source of finance.
Easy to budget as repayments are pre-arranged
No loss of ownership
Disadvantages of using loans as a source of finance.
Interest charged
Usually secured against an asset that could be seized if loan is not repaid
Show financial statements to banks to secure the loan
Advantages of using crowd funding as a source of finance.
No interest paid
Finance is received from a number of investors
Gauges peoples interest in the business
Disadvantages of using crowdfunding as a source of finance.
Partial loss of ownership
May not reach your crowd funding target as interest in the business may not be there
Someone could steal your idea from the crowdfunding platform
Advantages of using venture capital as a source of finance.
Finance is made available along with advice and mentoring
Finance may be easier to obtain as venture capitalists are usually high risk high reward people
Disadvantages of using venture capital as a source of finance.
Loss of ownership and control
Conflicts may occur over the direction of the business
Advantages of using hire purchases as a source of finance.
Regular payments are good for budgeting
Spreads out the cost of an asset
Avoids paying a large lump sum
Disadvantages of using hire purchase as a source of finance.
Likely to cost more than buying the asset outright
Only suitable for lower cost items such as vehicles not land or buildings
Advantages of using leasing purchases as a source of finance.
Maintenance and repairs are the responsibility of the supplier
Spreads the cost of the asset rather than paying a lump sum
