2.1 - sources of finance

• advantages of using owners capital

  • it does not have to be paid back
  • no intrest involved
  • quick and convenient
• disadvantages of owners capital

  • high risk for the owner
  • owner might not have sufficient savings or may need the cash for personal use
  • once the money has gone it is gone
• advantages of retained profits

  • doesnt need to be repaid
  • no intrest
• disadvantages of retained profts

  • for profits to build up this way it can take long and good business opportunities may be missed
  • shareholders may prefer dividens if the business is not achieving sufficient high returns on investment
• advantages of selling fixed assests

  • the business can get money from old machinery therefore saving money
  • no longer will need to store old machinery
• disadvantages of selling fixed assets

  • businesses may not have assets to sell
  • since individual assets need to be transferred, the transaction can be more time consuming and require more paperwork
• advantages of sale and leaseback

  leaseback -  an arrangement in which the company that sells an asset can lease back that same asset from the purchaser.

  • it gives firm cash and improves cash flow.
• disadvantages of leaseback

  • you do not own the asset anymore
  • lack of control of the asset at the end of the lease term
• advantages of debt factoring

  • cash is raised quickly
  • business is not chasing a payment
• disadvantages of debt factoring

  • total revenue from those sales fall
• advantages of bank loans

  • repayments are spread over a long period of time
  • finance is raised quickly
  • lower intrest rate than a bank overdraft
• disadvantages of bank loans

  • paying intrest which can be difficult for new businesses
• advantages of bank overdrafts

  • it is cheaper than a bank loan in the SHORT term
• disadvantages of bank overdrafts

  • intrest has to be repaid when demanded by the bank and can be very high
  • very expensive if used over a LONG period of time
• advantages of share issue

  • it does not have to be repaid
  • no intrest
  • large amounts of finance can be raised
• disadvanatges of share issue

  • shareholders need to be paid a dividend each year
  • shareholders become part owners of the business so you lose control
• advantages of leasing

  • business can use up to date equipment
  • good for budgeting as payments can be spread out
• disadvantages of leasing


  • it can be expensive as purchasing your own asset may be cheaper in long term
  • asset belongs to the finance company
• advantages of hire purchase

  • business eventually will own it
  • good for budgeting as payments are spread
• disadvantages of hire purchase

  o more expensive than buying the machine out right
• advantages of a mortgage

  • business can use property
  • good for budgeting as payments can be spread out
  • building equity, as you pay off your mortgage, you'll be building equity in the property, which can increase your net worth over time.
• disadvantages of mortgages


  • if business does not meet repayments it could be repossessed.
  • commiting to repaying a debt for a long time, often decades.
• advantages of trade credit

  • helps improve businesses working capital.
  • business has immediate use of goods which helps aid their cashflow.
  • flexibility in payment terms, allowing businesses to pay their invoices at a later date.
  • improved cash flow management, trade credit allows businesses to acquire goods wihtout immediate cassh outflows.
  • building a strong relationship with suppliers which can lead to preferential treatment, better terms and access to exclusive deals.
• disadvantages of trade credit

  • business may be short of cash sp struggles with payments which means potential disruptions in the supply chain.
  • delayed payments can incur implicit intrest costs as suppliers could have used the funds elsewhere or incurred financing expenses.
  • excessive reliance of trade credit can reduce a business's negotiating power with suppliers due to being dependent on them.
• advantages of government grants

  • no intrest
  • no repayment
• disadvantages of government grants

  • not all businesses are legible for grant.
  • short-term option, can only fund you for a short amount of time.
• advantages of business angels

  business angel - wealthy individuals making personal investments into start-up businesses in return for a share of the business.

  • less risky than a loan
  • get good business advice from the BA
• disadvantages of business angels

  • loss of control of the business
  • need to share the profits with the BA
• advantages of debentures

  debenture - long term loan which is issues by the company, usually with a fixed rate of intrest. It is unsecure, issuer typically offers higher intrest rates.

  • intrest may be made by company
  • more secure than investing in shares
• disadvantages of debentures

  • security facotrs involved which can mean higher intrest