sources of finance - advantages and disadvantages

Question 1

adv&dis owners equity (sole traders and partnerships only)

Answer 1

adv - the money doesn’t have to be repaid
- no interest has to be paid

dis - there may be insufficient money to fund the business

Question 2

adv&dis bank loan

Answer 2

adv - the money can be obtained in one lump
- repayments can be spread over several years so budgeting is easier

dis - interest has to be paid
- small businesses may find it hard to obtain a bank loan and may have to pay higher rates of interest

Question 3

adv&dis grant

Answer 3

adv - the money does not need to be repaid
- a large amount of money can be received at one time

dis - there may be certain restrictions as to what the money can be used for
- time consuming and complex application process

Question 4

adv&dis re-invested profits

Answer 4

adv - there are no extra costs eg interest to be paid

dis - there may be insufficient money to fund the business

Question 5

adv&dis mortgage

Answer 5

adv - amount can be repaid over a long period of time (eg 25 years)

dis - interest has to be paid
- if repayments are not made then the property may be repossessed

Question 6

adv&dis leasing

Answer 6

adv - can obtain the asset without a large financial outlay

• repairs are carried out by the leasing company as part of the agreement
• can keep upgrading to the latest models/versions

dis - the business will never own the asset
- may end up paying more in the long run than purchasing the asset

Question 7

adv&dis hire purchase

Answer 7

adv - allows businesses to buy assets without needing the full amount up front
- once full payments have been made the asset is owned

dis - the asset is not fully owned until the last payment is made
- the total paid is more than the value of the asset due to interest charges

Question 8

adv&dis bank overdraft

Answer 8

adv - useful as a short-term source of finance to overcome cash flow problems
- you are not tied into an agreement which requires repayment over several years

dis - an expensive form of borrowing with high interest charges
- additional costs incurred if not pre-arranged with the bank

Question 9

adv&dis trade credit

Answer 9

adv - can buy goods and sell them on before payment is required
- provided payment is made within the agreed number of months then no interest is charged

dis - may lose out on prompt payments discounts
- may gain a reputation as a slow payer

Question 10

adv&dis issuing shares (Ltds only)

Answer 10

adv - large amounts of additional finance can be raised

dis - dividends have to be paid which reduces the retained profit for the company
- new shareholders will have a say in how the business is run (ownership is diluted)