Sources of finance - EduqasAdvantages and disadvantages of sources of finance

Businesses need to consider how they will fund their activities when starting up as well as their day-to-day operations. Various costs need to be covered, such as equipment, stock and paying bills.

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The advantages and disadvantages of the different sources of finance

Source of finance	Advantages	Disadvantages
Owners capital	quick and convenient doesn’t require borrowing money no interest payments to make	the owner might not have enough savings or may need the cash for personal use once the money is gone, it’s gone
Retained profits	quick and convenient easy access to the money no interest payments to make	once the money is gone, it is not available for any future unforeseen problems the business might face
Selling assets	can create space for more profitable uses can be quick raise money from unused equipment	might not get the full market value of the assets or even be able to sell them at all might need the assets in the future
Family and friends	low interest money may not need to be paid back	money may be lost if the business fails arguments may occur between family members
Bank loan	easy and quick to access can get a significant amount of money at one time	have to pay interest difficult for a new business to access
Overdraft	quick access allows emergency purchases	high interest rates is only a short term solution
Venture capitalists and business angels	gain money quickly potential to raise huge amount of money they may offer advice and help	owner must give away part of the business they may have a different vision for the business than the owner does
New partners	easy way to gain money potential to raise huge amount of money they may offer advice and help	owner must give away part of the business they may have a different vision for the business than the owner does
Share issue	can gain lots of money quickly no interest payable	give away part of the business leaves a business open to takeovers shareholders receive dividends
Trade credit	access to supplies without immediate payment no interest	short term, must be paid off quickly usually small amounts
Leasing	no large upfront payments leasing company may be responsible for repairs and maintenance	over time it can be a more expensive way to obtain assets assets aren’t owned by the business
Hire purchase	expensive assets can be purchased and paid back over time	interest is charged on hire purchase items equipment is not owned until the final payment is made
Government grants	does not need to be paid back available to small businesses	business needs to meet certain criteria it is time-consuming to apply for grants and to complete the paperwork

Source of finance	Owners capital
Advantages	quick and convenient doesn’t require borrowing money no interest payments to make
Disadvantages	the owner might not have enough savings or may need the cash for personal use once the money is gone, it’s gone

Source of finance	Retained profits
Advantages	quick and convenient easy access to the money no interest payments to make
Disadvantages	once the money is gone, it is not available for any future unforeseen problems the business might face

Source of finance	Selling assets
Advantages	can create space for more profitable uses can be quick raise money from unused equipment
Disadvantages	might not get the full market value of the assets or even be able to sell them at all might need the assets in the future

Source of finance	Family and friends
Advantages	low interest money may not need to be paid back
Disadvantages	money may be lost if the business fails arguments may occur between family members

Source of finance	Bank loan
Advantages	easy and quick to access can get a significant amount of money at one time
Disadvantages	have to pay interest difficult for a new business to access

Source of finance	Overdraft
Advantages	quick access allows emergency purchases
Disadvantages	high interest rates is only a short term solution

Source of finance	Venture capitalists and business angels
Advantages	gain money quickly potential to raise huge amount of money they may offer advice and help
Disadvantages	owner must give away part of the business they may have a different vision for the business than the owner does

Source of finance	New partners
Advantages	easy way to gain money potential to raise huge amount of money they may offer advice and help
Disadvantages	owner must give away part of the business they may have a different vision for the business than the owner does

Source of finance	Share issue
Advantages	can gain lots of money quickly no interest payable
Disadvantages	give away part of the business leaves a business open to takeovers shareholders receive dividends

Source of finance	Trade credit
Advantages	access to supplies without immediate payment no interest
Disadvantages	short term, must be paid off quickly usually small amounts

Source of finance	Leasing
Advantages	no large upfront payments leasing company may be responsible for repairs and maintenance
Disadvantages	over time it can be a more expensive way to obtain assets assets aren’t owned by the business

Source of finance	Hire purchase
Advantages	expensive assets can be purchased and paid back over time
Disadvantages	interest is charged on hire purchase items equipment is not owned until the final payment is made

Source of finance	Government grants
Advantages	does not need to be paid back available to small businesses
Disadvantages	business needs to meet certain criteria it is time-consuming to apply for grants and to complete the paperwork

Suitability of the different sources of finance

Internal and external sources of finance

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