sources of finance

• Overdraft

  This is an arrangement with a bank where a business will be able to withdraw more money from its bank account than it actually has. Used for day-to-day expenses such as wages stock and bills.
• Advantages of Overdraft

  • Can help to meet short-term cash flow issues

  • The business can continue trading short-term

  • The size of the overdraft varies monthly and you pay interest only on the amount borrowed
• Disadvantages of Overdraft

  • Interest is charged on the daily amount of money which the business owes to the bank e.g. £2 per day. It can be expensive
• Trade Credit

   

  the business does not need to pay the supplier for the goods for a period of time – often 30 days. Can arrange longer period. Used for buying stock or raw materials.

   
• Advantages of Trade Credit

  • This source of finance allows a business to sell the goods before payment for them is due.

  The period of credit is usually interest free
• Disadvantages of Trade Credit

  • The goods must be paid for even if they do not sell

  • Interest is charged if the credit is not repaid within the agreed time
• Retained Profit

  profit which is made by the business but which is kept back to re-invest. Typically used for buying, expansion or replacement of equipment
• Advantages of Retained Profit

  • No interest has to be paid

  • No need to pay money

  • No cost to raise the finance
• Disadvantages of Retained Profit

  • Only available to businesses that have made profits
• Sale of Assets

  selling off a fixed asset such as machinery or premises that the business owns to turn it into cash. Typically used to fund expansion, replace equipment and for development purposes.
• Advantages of Sale of Assets


  • Good if the asset is no longer in use in the business
• Disadvantages of Sale of Assets

  • Can take time to sell the asset

  • May not find a potential buyer
• Loan

  an amount of money borrowed from a bank or other lender, usually for a stated purpose. In some cases. Typically used for buying start-up, expansion or start-up and development activities

   
• Loan Advantages

  • Repayments are spread over time

  • Business knows the amount to be paid in instalments which helps budgeting
• Loan Disadvantages

  • The money which has been borrowed has to be repaid together with interest.

  • Business may need to risk an asset as security
• Owners capital/investment

  the existing owners use their own savings. Typically used for buying start-up, expansion or replacement capital equipment
• Owners capital/investment Advantages

  • No interest has to be paid

  • No need to re-pay money
• Owners/investment Disadvantages

  • If the owner or owners have no savings then they will need to use another source of finance.
• Taking a new partner

  a new partner contributes finance to the business. Typically used for buying expansion or replacement of capital equipment or for development purposes
• Taking a new partner Advantages

  • A new partner may bring new skills to the business.

  • No cost to raise finance
• Taking a new partner Disadvantages

  • The new partner will have a say in the running of the business

  • The new partner will be entitled to a share of any profits.
• Share issue

  new shares are sold, raising money for the business. Buyers become shareholders. They are part-owners of the business

  The investor can earn a dividend – share of the profit. Typically used for buying start-up, expansion or replacement capital equipment
• Share issue Advantages

  • A lot of finance can be raised from many investors

  • Money does no need to be paid back

  • No interest is payable
• Share issue Disadvantages

  • Dividends may have to be paid to shareholders

  • Shareholders are entitles to have a day in the running of the company

  • The business may be taken over and existing shareholders no longer own the business (if PLC)
• Crowdfunding

  money raised from ‘sponsors’ usually by advertising a business idea on a crowdfund raising website such as seedrs.com or kickstart.com. Typically used for buying start-up, expansion or replacement capital equipment and for paying for start-up and development activities
• Crowdfunding Advantages

  • A lot of finance can be raised from a lot of contributors

  • Used for start-up or expansion

  • No security is needed for loans
• Crowdfunding Disadvantages

  • Interest will need to be paid on loans

  • Profits may need to be shared as equities are sold