Sources of finance: advantages + disadvantages

Internal - Retained Profits

Advantages:
Free - no interest attached
Flexible - can be left in the business as cash or invested into assets etc.
Disadvantages:
Takes a long time to build up

External (Short term) - Overdraft

Advantages:
Flexible
Only used when necessary
Disadvantages:
High fees + rates of interest

External (Short term) - Commercial bills

Advantages:
Flexible timeframes
Can ‘fix’ interest rates
Disadvantages:
Usually involves large amounts (above 500,000)

External (Short term) - Commercial bills

Advantages:
Improves cash flow
Disadvantages:
Reduces profitability - Financial company takes portion of invoice

External (Long term) - Mortgage

Advantages:
Typically low interest rate and fees
Disadvantage:
Secured against property

External (Long term) - Debentures + Unsecured notes

Advantages:
Retain ownership and control
Interest is tax deductible
Disadvantages:
Higher interest than mortgages
May not be flexible

External (Long term) - Leasing

Advantages:
Does not reduce ownership
Costs of establishing leases may be lower than other financing sources
Disadvantages:
Interest may be higher than other forms of borrowing