Skip to main content

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

Comments

Post a Comment

Popular posts from this blog

EXTERNAL COSTS AND EXTERNAL BENEFITS

External costs An external cost occurs when producing or consuming a good or service imposes a cost (negative effect) upon a third party. If there are external costs in consuming a good (negative externalities), the  social costs  will be greater than the private cost. The existence of external costs can lead to market failure. This is because the free market generally ignores the existence of external costs. External marginal cost (XMC)  the cost to a third party from the consumption/production of one extra unit. Example of External Cost Driving a car imposes a private cost on the driver (cost of petrol, tax and buying car). However, driving a car creates costs to other people in society. These can include: Greater congestion and slower journey times for other drivers. Cause of death for pedestrians, cyclists and other road users. Pollution, health-related problems. Noise pollution. Example of Production External Cost Producing electricity from burning coal leads to air ...
Post a Comment
Read more

THE ROLE OF PROFIT IN AN ECONOMY

WHAT IS A PROFIT? Profit is the surplus revenue after a firm has paid all its costs. Profit can be seen as the monetary reward to shareholders and owners of a business. In a capitalist economy, profit plays an important role in creating incentives for business and entrepreneurs. For an incumbent firm, the reward of higher profit will encourage them to try and cut costs and develop new products. If an industry is profitable, it will encourage new firms to enter. If a firm becomes unprofitable, it will either have to adapt and change or close down. This profit motive can help increase efficiency, provide greater choice for consumers and allocate resources according to consumer preferences. However, profit can have a downside. To increase profits, firms may take action which cause  market failure . For example, an asset stripper could buy a failing firm – selling off its assets and then make workers redundant. Alternatively, a firm may increase profits by finding ways around environme...
Post a Comment
Read more

BUSINESS LOCATION

INTRODUCTION Most business studies textbooks can't resist starting a section on business location with the following phrase: "The three most important things in retailing are – location, location and location". However, although it is a well-worn cliché – it still has some merit. It was reputedly first said by the former boss of Marks and Spencer (Lord Sieff) to describe the main success factors in his business. And certainly in retailing, if you get the location wrong, it can have a serious and often disastrous effect on the business. For businesses in some sectors, location really is critically important. For others, it is a relatively minor decision. The key is to consider the main issues faced by a business choosing a business location and to address the most appropriate way of making a choice. Location decisions are usually pretty important – to both large and small businesses. The location decision has a direct effect on an  operation's costs  as well as its abi...
Post a Comment
Read more