sources of finance

• owners capital is

  • Money introduced by the existing owner.
  • Internal source of finance
• owners capital +:

  • No interest or repayments.

  
  

  • No need to share profits with new partner(s) or through dividends to shareholders.

  
  

  • No loss of control

  
  

  • Will reduce the Capital Gearing
• owners capital -:

  • There may not be enough cash available from the current owner.
  • The owner may need the cash for personal use
  • Once the money is gone, it is not available for any future unforeseen problems the business might face
• bank overdraft is

  • Short term, external source of finance.
  • The business bank balance is negative.

  • Used for short term borrowing; as an aid to cash flow problems
• bank overdraft +:

  • Flexible because business only borrows and pays interest on the amount needed.
  • No loss of ownership
  • Is repaid when the business is able to do so 
  • Useful  for emergencies when quick access to cash is needed
• bank overdraft -:

  • Interest is an additional cost to the business
  • The rate of interest is likely to be higher than for a bank loan
  • The overdraft facility can be cancelled by the bank without notice.
  • security may be required
• bank loan

  • Long term loans from banks, external  source of finance
  • Fixed amount that must be repaid with interest, usually in equal monthly instalments.
• bank loan +:

  • No repayments due after the loan has been repaid (unlike dividend payments)
  • No loss of ownership (unlike shares)
  • No large lump-sum repayments which is good for cash flow.
• bank loan -:

  • Interest is an additional cost to the business.
  • Repayments must be paid whether the business can afford it or not.
  • Increases the level of capital gearing.
  • Usually requires security (in the form of a NCA).
• mortgage is

  • Long term, external source of finance.
  • Used to buy property.
  • Secured against the property.
• mortgage +:

  • Monthly repayments are an affordable way to buy or improve property.  Can be budgeted for.
  • No repayments due after the mortgage has been repaid (unlike dividend payments)
  • No loss of ownership (unlike shares)
• mortgage -:

  • Interest is an additional cost to the business.
  • The property is used as security so can be repossessed if the business is unable to keep up repayments.
  • Increases the level of capital gearing.
  • The large initial deposit might cause cash flow problems.
• ordinary share capital:

  • Money invested by shareholders.
  • Cannot be issued by sole traders or partnerships.
  • Permanent external source of finance.
• ordinary share capital +:

  • No interest or repayments due
  • Dividends paid will depend upon what the company can afford.
  • No security is needed.
  • Shares reduce the level of capital gearing.
• ordinary share capital -:

  • Part of the profits will need to be paid to the shareholders as dividends
  • Loss of control is a risk if over 50% of the company is sold to ordinary shareholders.

  Large amounts paid in CASH dividends can damage cash flow and cause liquidity problems.
• debentures:

  • Long term loans from investors.
  • External 
  • Maybe secured against an asset.
  • Debenture holders receive a fixed rate of interest each year (finance cost of the business)
  • Only available to limited companies.
• debentures +:

  • No loss of control (unlike issuing shares)
  • No repayments due for several years (unlike bank loans) which can help cash flow, particularly in the initial year after an investment, allowing time for the investment to start generating cash and profits .
  • After an agreed date no more interest or repayments are needed (unlike shares)
• debentures -:

  • Interest is an additional cost to the business and must be repaid whether the business can afford it or not.
  • Large repayments in one lump sum can damage cash flow at that time.
  • Increases the level of capital gearing.
  • May require security.