sources of finance & Sole trader

What is a sole trader?

A sole trader is a business owned by one person.

Advantages of a sole trader?

1. Decisions are made quickly as they are being made by the sole trader alone.

2. Sole trader keeps all the profits

3. No special legal paperwork is required

4. The business affairs are kept quiet

5. Usually local, so can satisfy the needs of the area

Disadvantages of a sole trader?

• unlimited liability

• long hours

• Finance may be limited/difficult to raise

• Difficult to provide cover for holidays and illness

What is Unlimited liability?

• Unlimited liability is being responsible for all the debts incurred in the running of the business

• This may mean that the sole trader could lose their personal possessions if they go bankrupt e.g their home.

Examples of a sole trader?

• Plumbers

• Joiners

• Painters/decorators

What is owners Equity?

Finance at their disposal, that they are willing to invest in the business.

Advantages of Owners Equity?

• No interest to pay

• No repayments

• Maintain control

Disadvantages of Owners equity?

At risk of losing finance if business fails.

What are Retained Profits?

Finance kept back from the previous years profits.

Advantages of Retained profits?

Maintain control.

Disadvantages of Retained Profits?

Businesses that self finance using retained profits often find it difficult to grow at speed.

What is a bank loan?

An agreed amount of money borrowed from the bank, payable back in instalments with interest added.

Advantages of a bank loan?

• Assists with budgeting as repayments are made at regular, fixed instalments

• Simple to arrange

• Once approved the money is available quickly

Disadvantages of a bank loan?

• Small businesses tend to pay higher rates

• Interest and principal must be paid, additional expense affects cash flow

What is Friends and Family loan?

Borrowing finance from family members or friends.

Advantages of friends and family loans?

• Possibility of greater flexibility with repayments

• No interest

• Easy to arrange

Disadvantages of friends and family loans?

Possibility of disputes, disagreements and falling out.

What is a Bank overdraft?

A short term facility that allows a business to spend more money than is in its bank account, up to an agreed limit.

Advantages of a Bank overdraft?

• Simple to arrange

• Relatively cheep in the short term as interest is only charged on the actual amount borrowed, for the number of days borrowed.

Disadvantages of a Bank overdraft?

• Expensive in the long term - high rates of interest

• if the limit is exceeded, the facility may be withdrawn and/or expensive charges incurred

What is a Government Grant?

Finance given to a business from central or local government, if they meet certain conditions.

Advantages of a government grant?

• Doesn’t need to be replayed

• No interest to pay

Disadvantages of a government grant?

• Usually a one of payment

• The finance must be used for the specified purpose applied for

• Requires a great deal of paperwork

• Not quick as it takes time to process

What is Trade Credit?

Trade credit allows a business to buy goods from a supplier and pay for them at a later date.

Advantages of trade credit?

Assists with cash flow as goods can be bought now and be paid for at a later date.

Disadvantages of trade credit?

• Discounts for prompt payment is lost

• If payment is made out of the credit period/terms, suppliers may be reluctant to sell more goods on credit

What is Dept factoring?

Dept factoring is when a business sells its unpaid customer invoices to a factoring company for less than their value.

Advantages of Dept factoring?

Assists with cash flow as advance payment of bills is made by the factor.

Disadvantages of Debt factoring?

• Factors tend to only be interested in large values and quantities of invoices as they charge per invoice

• The business does not receive the full amount of the original invoice from the factor

What’s a Mortgage?

A mortgage is a long term loan from a bank to buy a property

Advantages of a Mortgage?

• Can be repaid over longer time e.g 25 years

• Can be payed in instalments

• Interest rate may be lower

Disadvantages of a Mortgage?

• Interest must be paid

• Loan must be repaid