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SHORT-TERM AND LONG-TERM SOURCES OF FINANCE

The advantages and disadvantages of the different sources of finance

Source of financeAdvantagesDisadvantages
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

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