Sources of finance - Small businesses

• Overdraft

  The business makes payments from their account which exceeds the cash they have available
• Overdraft

  • External
  • Short-term
• Bank Loan

  A business applies to lend a set amount of money form a bank
• Owners Capital

  The owner invests their own money into their business
• Trade Credit

  A business sets up an account with their suppliers and agrees payment terms, then pays for goods or service later
• Retained Profits

  A business makes net profit then reinvest this profit back into business
• Share Capital

  Finance is raised by selling shares in the business to investors who become shareholder
• Venture Capital

  Investment of money into a business in exchange for an agreed share in the businesses equity
• Crowdfunding

  People contribute money into a business idea without receiving shares
• Bank loan

  • External
  • Long term
• Owners capital

  • Internal
  • Long term
• Trade credit

  • External
  • Short term
• Retained profit

  • External
  • Long term
• Share capital

  • External
  • Long term
• Venture capital

  • External
  • Long term
• Crowdfunding

  • External
  • Long term
• Advantages of Overdraft:

  • Business only pays interest when overdrawn
  • Quick and easy
  • No charge for clearing the balance early 
• Disadvantages of Overdraft:

  • Dept can increase rapidly if not paid with asset at risk
  • Difficult to predict the costs of borrowing money  
• Advantages of Bank Loan:

  • Business and bank both enter loan agreement knowing exact details
  • Helps cash flow planning
  • No additional fees
• Disadvantages of Bank Loan:

  • Assets at risk 
  • Early repayment fees 
  • Time taken to setup and not guaranteed for all businesses
• Advantages of Owners Capital:

  • Low risk option as there’s no interest or additional fees
  •  Shows owners commitment to the business
• Disadvantages of Owners Capital:

  • Owner can lose all the money they invest
• Advantages of Trade Credit:

  • Allows business to potentially sell the products, recoup costs or even make profit before paying supplier
  • Very easy to setup and low cost source of finance 
• Disadvantages of Trade credit:

  • Business can lose good suppliers and gain bad reputation if not paid back on time
• Advantages of Retained Profit:

  • No restrictions on how retained profits are spent 
  • Does not have to be repaid
  • No additional interest charges 
• Disadvantages of Retained Profit:

  • Can cause disagreements between shareholders 
• Advantages of Share Capital:

  • Does not cost the business anything to raise this type of finance 
  • Business is in full control of who, how much they invest and how the investment is spent
• Advantages of Crowdfunding:

  • Simple, accessible and quick to set up and reach an audience of potential contributors 
  • Business owner retains full control of the business
• Disadvantages of Crowdfunding:

  • Contributions are not guaranteed
  • Very competitive 
  • Ideas can be stolen
• Disadvantages of Share Capital:

  • Future business profits are shared between all shareholders
  • Owners share reduces every time new investment is received
• Advantages of Venture Capital:

  • Available for businesses which banks have deemed too risky to loan money to
• Disadvantages of Venture Capital:

  • More equity usually given away to secure investment due to the increased risk 
  • Timescale for investments is usually 3 to 6 months