Sources of finance for a sole trader

Question 1

What are the sources of finance for a sole trader?

Answer 1

A sole trader has the following options:
obtain a bank loan
obtain a mortgage
obtain a local council/government or EU grant
Arrange a bank overdraft
Invest (more) capital in the business
Reinvest profits

Question 2

What are the advantages to the source of finance: personal savings/invest more capital?

Answer 2

The money does not have to be repaid.

A fast way of obtaining cash for the business.

Question 3

What are the disadvantages to the sources of finance: personal savings/invest more capital?

Answer 3

Puts the owner at greater risk if the business fails.

Question 4

What are the advantages to the source of finance: Bank Loan?

Answer 4

Relatively simple to arrange.

Repayments can be made monthly and spread over several years eg 3, 5, 7, 10 years.

Question 5

What are the disadvantages to the source of finance: Bank Loan?

Answer 5

The loan must be repaid monthly with interest over several years.
If interest rates are high then this could be an expensive way to raise finance.

Question 6

What are the advantages to the source of finance: Mortgage

Answer 6

Repayments can be spread over a long period of time eg 25 years.
A large amount of money can be obtained relatively quickly.
No loss of control in the business.

Question 7

What are the disadvantages to the source of finance: mortgage?

Answer 7

A mortgage must be repaid back with interest.

The amount repaid is far more than the amount borrowed in the first place.

Question 8

What are the advantages of the source of finance: Grant from EU?

Answer 8

A grant does not have to be repaid.

No interest payments have to be made on a grant.

Question 9

What are the disadvantages of the source of finance: Grant from EU?

Answer 9

May be difficult to obtain
May take a long time to arrange
There may be restrictions as to what the money can be used for and certain requirements have to be met.

Question 10

What are the advantages of the source of finance: Retained profits?

Answer 10

Does not have to be repaid.

No interest is payable.

Question 11

What are the disadvantages of the source of finance: Retained profits?

Answer 11

Retained profits may not be enough finance therefore other sources are still needed.