Sources of Finance: A Comprehensive Guide

This document provides an in-depth look at various sources of finance available to businesses, explaining their characteristics, benefits, and drawbacks.

• Covers a wide range of financing options, from internal to external sources
• Explains key features and implications of each financing method
• Suitable for students and entrepreneurs seeking to understand business financing options

Retained Profit

Retained profit refers to profits from previous years reinvested into the company.

Definition: Retained profit is profit that has been made by the business in previous years that is then reinvested back into the company.

Advantages of retained profit include:

• Can be used for larger purchases or bulk buying
• The business doesn't incur debt

Highlight: Using retained profit for expansion can be advantageous as it doesn't require external borrowing.

Disadvantages of retained profit include:

• It may take too long to accumulate, potentially causing missed business opportunities

Vocabulary: Retained profit disadvantages refer to the limitations of using this internal source of finance.

Sale of Assets

This involves selling items the business no longer needs, such as machinery or transport.

Advantages:

• Raises money to reinvest in other areas of the business
• Boosts cash flow

Disadvantages:

• If finance is urgently required, assets may be sold for less than their worth

Share Issue

Available only to private or public limited companies, this involves issuing more shares to obtain finance.

Advantages:

• Large amounts of finance can be raised
• Finance doesn't need to be repaid

Disadvantages:

• Shareholders need to be paid dividends annually
• Shareholders become part-owners of the business

Example: A growing tech startup might issue shares to fund its expansion into new markets.

Bank Loan

A long-term source of finance where a fixed amount is borrowed and repaid with interest over time.

Advantages of bank loans for business include:

• The business can budget for repayments
• Essential equipment can be purchased in advance and paid back over years

Highlight: Bank loan advantages and disadvantages should be carefully considered before borrowing.

Disadvantages of bank loans in business:

• Interest must be repaid along with the loan amount
• Small businesses may find it harder to secure loans and often face higher interest rates

Commercial Mortgage

A long-term finance source secured against a business property and repaid in instalments.

Advantages:

• Mortgage is given for a long period
• Large amounts of finance can be raised quickly

Example: A restaurant owner might use a commercial mortgage to purchase the building they operate in.

Disadvantages of mortgage in business:

• Interest is charged on the loan
• Property can be lost to the lender if repayments are missed

Debt Factoring

A short-term finance source where firms sell their invoices to a factor for immediate cash.

Advantages:

• Time and effort saved on recovering unpaid debts

Disadvantages:

• Money is lost as unpaid debts are sold at a reduced value

Debentures

Loans given to the business by individuals, with interest paid annually and the loan repaid in full at an agreed future date.

Advantages:

• Control of the business is retained
• Can be paid back over a long period

Disadvantages:

• Interest must be paid even if the company makes a loss

Government Grants

Fixed amounts of money awarded by the government, EU, or charitable organizations, often with specific conditions.

Definition: A grant is a fixed amount of money usually awarded by the government, EU, or charitable organisations, given on the condition that certain criteria are met.

Advantages and disadvantages of government grants: Advantages:

• Does not need to be repaid
• Often offered as an incentive to help businesses start or expand

Disadvantages:

• Business needs to meet certain criteria
• Time-consuming application and paperwork process

Venture Capital

Money provided by investors to starting or expanding companies, often involving higher risk.

Venture capital advantages and disadvantages: Advantages:

• Large amounts of investment can be gained
• Venture capitalists are willing to take on riskier investments than banks

Disadvantages:

• Control and a share of profits are given up to venture capitalists

Crowd Funding

Small amounts of money raised from a large number of people, typically through the internet.

Advantages:

• Finance can be raised from individuals when banks see a venture as too risky
• Some funds are donated, requiring no repayment

Disadvantages:

• Public requests for investment risk the project being copied by competitors
• If the targeted amount isn't reached, the money is returned to investors and the business gets nothing

Highlight: Understanding the advantages and disadvantages of retained profit, bank loans, mortgages, and other financing options is crucial for making informed business decisions.