Premium Essay

Sources of Finance and Their Advantages

In: Business and Management

Submitted By relmansuri
Words 1499
Pages 6
Sources of Finance and Their Advantages & Disadvantages
Rob Jennings http://smallbusiness.chron.com/sources-finance-advantages-disadvantages-14407.html
Personal Savings and Assets
Your personal savings and other assets make a great source of capital. Because you already have them, acquisition costs are minimal, and you won't be paying interest on a bank loan or sharing returns with investors. The drawbacks, of course, are that if you plow your personal savings into a business venture, you could lose it all. Some assets, such as retirement accounts, are safe from creditors and bankruptcy courts; placing such assets at risk may not be good for you, especially if you're approaching retirement age and are running out of time to rebuild depleted accounts.

Investors
Corralling a group of investors can help you raise start up or expansion capital for your business without placing all of the risk of loss on you alone. These investors may be active partners in the business, or they may be silent investors who simply provide capital and wait for their returns. The disadvantage to bringing in investors is that you do give up a certain element of control over the company. Even if you retain a majority interest, you'll need to keep your investors happy. Additionally, if you share the risk with others, you'll also have to share the profits.

Bank Loans
William Thayer http://smallbusiness.chron.com/advantages-amp-disadvantages-bank-loans-47377.html
Private Banks can be another good source of funding. For small ventures, you may be able to secure a personal loan or line of credit; for larger operations, you may have to leverage assets -- real estate, large equipment or inventory -- by using them as collateral to secure the loan. The advantage to borrowing the money is that it enables you to keep your cash on hand to use as operating capital or for personal survival...

Similar Documents

Premium Essay

P4 Sources of Finance Unit 2

...P4 Sources of Finance INTERNAL An internal source of finance means to get money from within the business. Owners Savings The owners’ savings is the potential owners’ own money which is normally used when starting up a business. This can be a good source of finance especially for sole traders because since the owner has been saving up for most of their life, they would have enough money to invest in the business and they don’t have to worry about paying any employees or shareholders. However, there can be a disadvantage for sole traders when using this source of finance because they must be careful when investing money as they must know their limits in case they don’t have enough money to support themselves. PLC’s (Public Limited Company) would also use this source of finance through their shareholders who each invest money into the business. There can be an advantage for shareholders who use this source of finance when investing money into the business because if the business gains a profit, the shareholders will gain a dividend which means they will each get a share of the profits they make. However, there can also be a disadvantage because if the business makes a loss, the shareholders will lose the money they invested. Capital from profits Capital from profits refers to the money left over after most of the profits that have been earned have been shared with each of the shareholders. There are advantages of using this source of finance because the capital that is left...

Words: 2148 - Pages: 9

Premium Essay

Financial Management

...IDETIFYING DIFFERENT SOURCES OF FINANCE TO PLC ADVANTAGES AND LIMITATIONS Kensington College and Business & University of Wales In this article has been investigated about15 sources of capital finance available to PLCs January 2011 Nahid Mohsen Pour Nahid Mohsen Pour 2 identifying different sources of finance to Plc, advantages and limitations Contents QUESTION .............................................................................................................................. 3 ANSWER .................................................................................................................................. 3 LOAN STOCKS AND DEBENTURES ................................................................................. 3 DEBENTURES ........................................................................................................................ 4 CONVERTIBLE DEBENTURE ............................................................................................ 4 ORDINARY SHARES............................................................................................................. 4 PREFERENCE SHARES ....................................................................................................... 5 VENTURE CAPITAL ............................................................................................................. 5 BUSINESS ANGELS ..........................................................................

Words: 3555 - Pages: 15

Premium Essay

Alternative Sources of Raising Capital in Shipping Corporations: Bridging the Funding Gap

...MSc in Shipping Trade & Finance 2011/2012 Alternative Sources of raising capital in shipping corporations: Bridging the Funding Gap By Linos Alexandros Kogevinas 100021584 Supervisor: Dr. Giovanni Cespa Acknowledgments Having completed a rather long, but enjoyable year at Cass Business School , I feel obligated to thank a few people who helped me along the way. Firstly, I’d like to offer my most sincere thanks to my supervisor, Dr. Giovanni Cespa for accepting to supervise me and putting me on the right track with this dissertation. Following, I’d like to thank my family for their moral support throughout the year. Last but not least I’d like to thank the entirety of the staff at Cass who helped further my education throughout the year. To all of you, Thank you Abstract The goal of this thesis is to evaluate and present the main alternative sources of finance for shipping corporations in the scope of the post-2008 market downturn. By “alternative” the author refers to any source finance that is not vanilla financing i.e. bank debt. Lists of benefits and drawbacks for each alternative source will be presented for all parties of the transaction in question. This is done in order to present an evaluation that will facilitate the reader in understanding the value of each source as well as potential costs and risks. While there are numerous alternative sources that could be covered, the emphasis has fallen only on those that carry at least......

Words: 7194 - Pages: 29

Premium Essay

Internal vs External Sources of Finance

...as accidents or natural disasters. The difficulties in obtaining these funds constitute one of the major challenges in running a business. The two major sources of business finance are internal and external funding. This paper examines the differences between internal and external sources of finance. It will also examine the advantages and disadvantages of each source. Internal sources of Finance Internal source of finance refers to funding generated within the business as opposed to financing obtained from outside sources. Internal funding can be obtained from retained earnings, sale of assets, depreciation, reduction or control of capital. Retained earnings: These are profits left over after a firm has settled its debts and paid out dividends to shareholders. The leftover funds can then be ploughed back into the business. The advantage of this method is that there is no borrowing cost associated with it. The firm has total control over the decision to use the funds and is not subjected to any vetting by lenders. The disadvantage of using retained profits as a source of funding is that the company may not have cash readily available in times of urgent need (Timimi, 2010). Sale of asset: The sale of assets is another source of internal financing. A business may choose to sell some of its assets to generate cash to finance its business needs. These assets could be in the form of patents, real estate, art work, equipment, or machinery. Although this strategy may work......

Words: 1729 - Pages: 7

Premium Essay

Business

...Internal and External sources of finance for ASDA There are five internal sources of finance: • Owner’s investment (start up or additional capital) This is money which comes from the owners own savings. It may be in the form of start up capital - used when the business is setting up. It may be in the form of additional capital – perhaps used for expansion. This is a long term source of finance. Advantages of this are that it doesn’t have to be repaid and no interest is payable. Disadvantages of this is that there is a limit to the amount an owner can invest. • Retained profits this source of finance is only available for a business which has been trading for more than one year. It is when the profits made are ploughed back into the business. This is a medium or long-term source of finance. Advantages of this can range from the fact that it doesn’t have to be repaid and that no interest is payable. Disadvantages of this are that some businesses are unlikely to have surplus assets to sell also there can be a slow method of raising finance. ASDAs retained profit in 2013 was £5.1billion. In 2014 it increased to £5.5billion. • Sale of stock This money comes in from selling off unsold stock. This is what happens in the January sales. It is when the profits made are ploughed back into the business. This is a short-term source of finance. Advantages of this are that it is a quick way of raising finance. Also by selling off stock it reduces the costs associated with holding......

Words: 430 - Pages: 2

Premium Essay

Unit 2

... Scenario | Source of finance | Explain | Internal or external | 2 Advantages | 2 disadvantages | New factory premises | Mortgage | A mortgage is loan which is given by the bank to the person who seeks it. To claim the loan the seeker must agree with the terms and conditions, and agree that if they fail to return the payments then their personal properties would be at risk of being taken. | This is external source of finance because you are borrowing money from the bank which is external as you are accossiating with someone from outside of your business. | An advantage of a mortgage would be that since you could take out a loan and you wouldn’t need to pay up to 25 years, which is good because it means you could take your time to pay and pay in different amounts depending on the amount you have. Another advantage would be that when you take out a loan it has a low interest rate which means the business wouldn’t need to pay much money back. | A disadvantage would be that if the debtor doesn’t pay back the mortgage within the given time period, the bank would have the right to take over their property, as it is by the law. Another disadvantage is that the interest rates could raise any time which means business may unexpectedly have to pay more. | Repair the existing factory premises and convert the old storage area into a workshop area with benches | Long-term source of finance | To repair the existing factory premises is a long-term source of finance because this......

Words: 1375 - Pages: 6

Premium Essay

Business

...are short term sources of finance and long term sources of finance. The first short term source of finance is debt factoring. Debt factoring a factoring company takes responsibility for collecting money relating to business’s invoices, and immediately pays that business part of the total amount owed on the invoices. End of the year of financial, the company Astion bhd. has RM 87665082 or 87million receivable at year 2012. By using debt factoring, company can immediately get a part of the total amount of receivable. The advantage are company can get the money immediately instead waiting receivable to pay. Company also enjoys the advantage such as reduce the rise of getting doubtful debt or bad debt. Getting money now is more relevant than future; it can generate more money to the company in the future. So the company can use this amount of money to invest in new project. The second short term sources of finance is bank overdraft. A bank overdraft is a limit on borrowing on a bank current account. With an overdraft the amount of borrowing may vary on a daily basis. Company can borrow money with bank to settle the payment which is urgent. Some of the advantages of bank overdraft are flexibility which the company can change the amount of borrowed within limited. Besides that, the interest also only paid on amounts borrowed. Beside the short team sources of finance, Astion bhd. also can choose the long team sources of finance. The long team sources of finance is suitable to......

Words: 680 - Pages: 3

Premium Essay

Sources of Finance

...INTRODUCTION Finance is the lifeblood of business concern, because it is interlinked with all activities performed by the business concern. In a human body, if blood circulation is not proper, body function will stop. Similarly, if the finance not being properly arranged, the business system will stop. Arrangement of the required finance to each department of business concern is highly a complex one and it needs careful decision. Quantum of finance may be depending upon the nature and situation of the business concern. But, the requirement of the finance may be broadly classified into two parts: Long-term Financial Requirements or Fixed Capital Requirement Financial requirement of the business differs from firm to firm and the nature of the requirements on the basis of terms or period of financial requirement, it may be long term and short-term financial requirements. Long-term financial requirement means the finance needed to acquire land and building for business concern, purchase of plant and machinery and other fixed expenditure. Longterm financial requirement is also called as fixed capital requirements. Fixed capital is the capital, which is used to purchase the fixed assets of the firms such as land and building, furniture and fittings, plant and machinery, etc. Hence, it is also called a capital expenditure. Short-term Financial Requirements or Working Capital Requirement Apart from the capital expenditure of the firms, the firms should need certain......

Words: 1839 - Pages: 8

Premium Essay

Small Business Finance

...Sources of Finance Loan from Family/Friends: Borrow money from another family member or friend, where length of loan, interest rate on loan and any other terms of the loan must be negotiated between parties. Advantages of a loan from family/friends is lower interest rates and more flexible repayment terms. Disadvantages of a loan from family/friends is lack of clarity with amount borrowed (the interest rate and the required payment terms) and also borrowing from friends and family can fracture relationships on a personal level Suitability Good Long or Short term finance option as terms of loan are decided between parties Interest rates are decided by parties Could be suitable source for Douglas Pty Ltd if family or friends have suitable amount of money for business and terms can be decided without affecting relationship. Bank Overdraft: Loan made by a bank in which the customer can withdraw more money from his or her bank account than has been deposited in the account. Advantages of bank overdraft is that it is a quick and flexible source of finance. They are easy and quick to arrange, with little fuss and It allows you to make essential payments when you need to borrow money. Disadvantages of bank overdraft are the costs as overdrafts carry interest (often at much higher than loans), Recall, the bank can recall the entire overdraft at any time. Security for overdrafts may need to be secured against your business assets, which put them at risk if you cannot meet......

Words: 1224 - Pages: 5

Premium Essay

Health and Wealth Event

...Finance is important to a business, without it, an organisation would not be able to run effectively, eventually leading the organisation to fail. The are many reasons why Finance is important to an organisation and many factors in can be used for, i.e. investing and purchasing fixed assets like land and building, necessary equipment and expanding the business. Organisations that have a solid finance available to their business are able implement changes that want, which could help to bring in more money to the organisation and allowing them to last and survive. There are two types of finances, external sources or internal sources. Sources of Finance: External sources of finance are available sources of income that have come from outside the organisation. Examples of external finance are: An overdraft from the bank. A loan from a bank or building society. The sale of new shares through a share issue.. Within external sources of finance, there are two options available to the organisation, short term & long term. Long-term finance means the business will pay back the loan taken out, over a longer period of time usually one year and over. The two main sources for long term are share capital & loan capital. In contrast to Long term, Short-term finance will be paid back in a short period of time,. This is divided into bank overdraft, hire purchase, trade credit, leasing, etc. Long term sources: Shares, Debentures, Public Deposits, Retained......

Words: 1604 - Pages: 7

Premium Essay

Finance Organization and Long Term Planning

...Finance Organization and Long-Term Planning Introduction Sensible Essentials, after considering the Genesis Corporation aggressive growth plan, suggested that Genesis should consider broadening their financing to consider long-term financing beyond just short-term financing. The organization has provided the potential costs and benefits of each long-term option available. Long-Term Financing A company needs long-term financing if they want to expand their business as Genesis is planning by starting operations in Europe and Asia. Sources of long-term financing include shares that are issued to the public and these holders are considered the owners of the business. There are two types of shares – equity and preference. The advantages of equity capital is no fixed maturity, no obligation to redeem, no compulsion to pay dividends, provides leverage capacity, and dividends tax exempt for investors. The disadvantages of equity capital are dilution of control of existing owners, high cost – rate of return expected by the equity holders higher than debt holders, dividends are not tax deductible, issue cost are higher due to underwriting, brokerage, and other issue expenses, along with higher servicing costs including post annual reports (Fedorov, 2012). Preference capital advantages are no obligation to pay dividend, no bankruptcy or legal action for non payment, financial distress of redemption obligation not very high, part of net worth which hence increases its......

Words: 1054 - Pages: 5

Premium Essay

Finance

...Business | Unit Title: Finance in the Hospitality Industry | INTRODUCTION A business is a commercial enterprise which exists with a view to making a profit.it may be a sole trader business, partnership or a company.( Financial accounting acca f3, study manual for exam in 2013) There are different legal private business sector structure. Sole trader, partnership and limited companies . Sole trader is a business owned by one person . the advantage of this business is that the owner has a full control of his business and all the profit are for him self. The desadvantage relied on unlimited liability. Partnership is a business owned by two people or more. The advantage is about shared decision and the desadvantage is that the profit also is shared. Limited business is a business run by directors and the advantage is shareholders has limited liability and whenever the owner dies the busines will exist. The disadvantage is that all the profit from the busines is shared among members. TASK 1 SOURCES OF FINANCE FOR DIFFERENT BUSINESS INCLUDE APPROPRIATE SOURCES OF FINANCE FOR THE ENCHANTED VALEY B&B. Finance is about the money that a business can use to purchase things that is needed . however, business can need money or finance for three reasons: to buy equipment or premises, to expand the business and to start the business. We have two types of sources of finance: internal sources of finance and external sources of finance. Internal sources of...

Words: 2465 - Pages: 10

Premium Essay

Why Is Finance Important to a Business?

...Why is Finance so Important to a business? Finance is a crucial part of a start-up business; it is the cornerstone to determine whether or not your business will jump over the first hurdle. Without sufficient finance, a business has a very low risk of surviving the first stage of development. Finance can be important for various activities throughout the business starting with the purchasing of stock. If you are providing a product you will most likely need raw materials, if not then you will need general stock. Having more expensive, higher quality stock will push you to a competitive advantage. (Chron, 2013, Electronic Source.) Finance allows you to buy in order to sell and hopefully make a profit on those goods. If you are providing a service then finance will allow you to buy tools or equipment to improve your service. Start- up businesses might not necessarily have anyone other than the entrepreneur working, however if you have employees then finance will help pay their wages. In U.K. you pay business tax on your business profits, the amount of tax you pay depends on how much profit you generate. Finance is important to be able to pay these and calculate how much you owe to the government. Not having the sufficient finance will reduce the chances of the business accepting negotiations, therefore restricting the business in terms of growth (Chron, 2013, Electronic Source). Business finance is spent on two types of expenditure, capital and revenue. Capital expenditure is......

Words: 2159 - Pages: 9

Premium Essay

History

...Owner’s Investment | This source consist in money injection by the owners AdvantagesThey can help you raise start-up or expansion capital for your business without placing the risk of loss. You can also make a profit that you can re-invest or put aside. A good return on an investment can maximise earning potentialDisadvantageIt is always possible to lose money on any investment you make. Let’s say you invest a certain amount of money into something that value can change or the interest rates might change meaning that you get less money that you invested into. Another disadvantage to bringing in investors is that you give up an element of control over the company. | Owner’s savings | The owner of the business has to use their own personal savings to start the business Advantages: They are a good source of finance for a business as interest does not need to be paid to someone else while the money is being used and the business remains totally in the control of the owner. DisadvantageIt can be limited and once you sell off your assets or spend the saving you will need a different source of finance | Capital from Profits | A business which is operating is able to invest the money that it makes as profits back in the businessAdvantageThis means that even greater profits may be made in the future. Another advantage is that there is capital availablefor growth. Improvements and expansion are expensive but necessary to remain competitive.DisadvantageOne is that the company has......

Words: 862 - Pages: 4

Premium Essay

Managing Financial Resources and Decisions

... Task. 1:1.1 AC identify the sources of finance available to the business. 1. Government grants A grant of monetary help with the type of cash by the government to a qualified grantee with no desire that the trusts will be paid back (staff, 2015) 2. Leasing Is a system that permits people to claim and make utilisation of specific resources for medium to long haul financing periods consequently for beforehand set between time instalments (Ahali.com, 2015) 3. Friends and Relative They may offer advances without security or consent to a more drawn out reimbursement period (Business gateway, 2015) 4. Government program Chosen, state, and neighbourhood governments have programs expected to help the financing of new interests likewise, little associations. The assistance is much of the time in the kind of an organization certification of the repayment of a development from a customary advance master Anon, (2015). [Online] available at: 5. Life insurance Is a way of ensuring your family or your friendship ones in the event that you pass away (you tube, 2012). 6. Personal savings The primary spot business visionaries ought to search for start-up cash is in their own pockets. It is the slightest costly wellspring of stores accessible (13 sources of finance, 2015). 7. Bank loans A development made by a bank to be repaid with eagerness at the exceptionally most recent a......

Words: 1195 - Pages: 5