sources of business finance

what do businesses think when choosing the most appropriate finance source

how much money will they need

what is the money needed for

how long is the money needed for

how expensive the source finance is

the business owner is ready to give up some control of the business

define short term sources

finance that is funded day to day, they can be payed up to a year.

define long term sources

sources that are normally used for big projects that can be payed back in a number of years.

examples of short term sources

overdraft

trade credit

description, advantages and disadvantages of overdraft.

when business withdraws an amount of money that is greater than of the amount of money in the businesses bank currently up to an agreed amount with the bank

advantages

• business uses it when needed

• interest is only used when the money borrowed is used

disadvantages

• high interest rate

• bank can cancel to overdraft anytime which is risky.

definition, advantages and disadvantages of trade credit.

when supplier gives goods to the business but is willing to wait for a while (possibly up to three months) to get their payment

advantages

• helps improve the cashflow

disadvantages

• difficult for start up businesses to do it becuase suppliers think they won’t get payment if they give a bit of time for business to give supplier their payment

• business can get bad reputation if they do not pay the supplier on time

examples of long term finance

personla savings

venture capital

retained profit

share capital

loans

definition, advantages and disadvantages of personal savings

using money from their own bank account to invest in the business

advantages

• no need to repay

• entrepreneur keeps control of the business

disadvantages

• amount of money can be limited

• if business fails the personal savings that the entrepreneur invested is also lost so it can affect the entrepreneurs personal life negatively

definition, advantages and disadvantages of venture capital

when individuals invest into the business in an exchange for shares and a high chance to making profit

advantages

• large access to fund

• individuals that invest in the business can offer expert advice

disadvantages

• loss of control of the business

• loans have to be payed back with higher interest rates than banks would charge

definition, advantages and disadvantages of share capital

the money raised by selling shares to individuals

advantages

• funds are permanently invested in the business

• no interest needs to be payed

disadvantages

• loss of control of the business

• increase in dividend

definition, advantages and disadvantages of loans

when money is borrowed for an amount of time until the business needs to pay it back at an agreed schedule.

advantages

• no control is lost in the business

• financial planning is easy

disadvantages

• includes interest

• if the payment of the loan cannot be fulfilled, business might have to give assets to the bank.

definition, advantages and disadvantages of retained profit

when business makes profit and they decide to put that profit and reinvest it back into the business

advantages

• no interest

• no loss of control of the business

disadvantages

• amount of money availability might be low

• can anger the shareholders since they receive less dividend

definition, advantages and disadvantages of crowd funding

business raises money online by receiving donations when the business publishes their idea.

Advantages

• low cost investment

• you can see if people are interested by looking at how much they have invested

disadvantages

• people want something in return

• hard to raise enough money