Sources of Finance

Question 1

Retained Profit

Answer 1

Profit remaining after paying dividends (and other expenses) that is invested back into the business

Pros – no loss of control, no interest, confidentiality

Cons – lowers dividend payments so shareholders may sell your shares, business may not grow

Question 2

Personal Funds

Answer 2

Owner put their own savings into the company

Pros – no loss of control, no interest, confidentiality

Cons – uncertainty of cash flow, difficult to gather large amounts of money, owner is completely responsible

Question 3

Sale of Asset

Answer 3

Selling physical and non-physical items that belong to the business

Pros – quick money, ability to reduce debt, can have tax benefits

Cons – reduces a company’s capital value

Question 4

Bank Loan (Loan Capital)

Answer 4

Borrowing money, usually from a bank, for a period of time. Interest is paid on the loan.

Pros – still have full control of business, no sharing of profits, easier than finding investors, paid before tax so have to pay less, can choose the amount of money that want and use it as you wish, good for cash flow planning - predictable, temporary, long term

Cons – difficult to obtain without good track record, bank can seize assets if unable to pay back, high interest rates, sometimes cannot get enough money

Question 5

Share Capital

Answer 5

Selling a part of the business to an investor

Pros – quick money, investor assumes all risk, don’t have to pay back loans and can reinvest into business, no interest payments, more flexible - don’t have to make dividend payments each year, short term

Cons – owners lose some control, business is accountable to stockholders, stockholders can stop some decisions of the owner

Question 6

Bank Overdraft

Answer 6

When the bank allows your account to go negative for a short period of time

Pros – short term, quick money, easy and quick to arrange, good cash flow, flexible

Cons – high interest (much higher than loans), expensive in long term, legal issues if limit is exceeded, bank can recall overdraft at any time, overdrafts may need to be secured against assets which puts them at risk

Question 7

Trade Credit

Answer 7

When a business delays paying its bills for goods and services after a period of time (rather than immediately). Usually 30 to 90 days.

Pros – reduced capital requirement, improves cash flow in the short term, can pay for products after they have been sold and profits are made, can focus on sales and marketing/research

Cons – if not paid back in time the business receives poor credit history which affects their ability to secure loans, only companies with good credit history can get trade credit, difficult for new businesses

Question 8

Debt Factoring

Answer 8

When a business is owed money but sells the debt to a third party in return for immediate cash

Pros – quick fix, debt factoring companies are usually competitive on price, improves cash flow and financial planning, reliable

Cons – loses money, and thus reduces profit margins, third party is involved, some customers prefer to deal directly with business, choosing a bad debt factoring company can damage reputation

Question 9

Leasing

Answer 9

Obtaining the right to use an asset for a fixed period of time in return with regular payment

Pros – cheaper in the short-term (better for cashflow short term), don’t have to worry about selling product when done with it, can replace for newer model when contract finishes, no repair/breakdown costs

Cons – costs more in the long term, monthly payments need to be paid, added fees, requires good credit

Question 10

Subsidies

Answer 10

Payments from the Government to a business to reduce their unit costs and encourage production

Pros – do not need to pay back, increases production, increases sales, usually does not have to be paid back

Cons – can cause a shortage of goods since cost is decreased, reduced profit margin, increases taxes

Question 11

Grants

Answer 11

Payments from the Government to a business for a specific purpose, usually for public benefit

Pros – can provide huge amounts of investments, gives organisation exposure and credibility

Cons – competitive and hard to get, spending of money is monitored by the government (must follow regulations and laws)

Question 12

Venture Capital

Answer 12

Organizations that are willing to invest in small businesses and start-ups with potential

Pros – provide business advice to the company, can form strategic partnerships, venture capitalists are experienced

Cons – drive a hard bargain, loss of control as venture capitalist wants control over decisions, may be interested in taking over the company

Question 13

Business Angel

Answer 13

A wealthy individual who invests in the business

Pros – quick money, no repayment, no interest, investor can provide advice

Cons – difficult to find suitable business angel, requires giving up share of the business, less structural support