Business Paper 1 - Business Finance (107 + 119)

Sale of Assets (Advantages + Disadvantages)

established business can raise cash by selling assets that are no longer required e.g buildings and machinery

Advantages:

• frees up cash invested into asset no longer used

Disadvantages:

• reduced capacity to earn revenue

Debt Factoring (Advantages + Disadvantages)

where a business can raise cash by selling their outstanding sales invoices to a 3rd party at a discount - short-term finance and is useful if business had cashflow difficulties

Advantages:

• instant cash for money owed to the business

Disadvantages:

• lose value + reduced profit margins (profit earned in relation to revenue)

Retained Profit (Advantages + Disadvantages)

where business uses the profits made at the end of the financial year to reinvest back into the business to fund expenses

Advantages:

• free and instantly available

Disadvantages:

• may not have any or enough

Share Issue (Advantages + Disadvantages)

where a business sells new shares of ownership in the business to fund expenses

Advantages:

• don’t have to pay it back + can gain large sums of money

Disadvantages:

• has to be interest + can lose ownership

Overdraft (Advantages + Disadvantages)

where the bank allows a person to take more money out of their account than there really is - can be charged interest/fee - short-term use only

Advantages:

• quick/easy to arrange + only used when needed

Disadvantages:

• expensive long-term + can be withdrawn at any time

Bank Loan (Advantages + Disadvantages)

borrowing a fixed amount for a fixed period - payments are usually made monthly

Advantages:

• can spread cost pf a fixed term which makes payments more manageable

Disadvantages:

• has to be approved by the bank + must pay interest

Trade Credit (Advantages + Disadvantages)

where a business pays for items e.g raw materials or fuel but pays for them at a later date (usually 30-90 days later)

Advantages:

• free source of credit and can be used to delay payments out of the business

Disadvantages:

• missing out on discounts + could be withdrawn in relationship with supplier turns toxic

Leasing (Advantages + Disadvantages)

where a business pays for the use of an asset/equipment but never owns the asset

Advantages:

• pay value of asset used

Disadvantages:

• extra monthly expenses - bad for cashflow

Internal sources of finance

finance generated from within the business e.g. sale of assets, owners capital, reinvested profits

External sources of finance

finance raised from outside the business e.g bank loans, overdrafts, debt factoring, leasing

Share Capital (Advantages + Disadvantages)

money invested into the business by shareholders and in return want ownership of the business (long-term finance) - LTD and PLC companies have share capital

Advantages:

• can gain lots of money

• no interest payable

Disadvantages:

• give away part of the business

• open to takeovers

• shareholders want to receive a dividend

Venture Capital (Advantages + Disadvantages)

usually invests in small-medium high risk growing businesses in return for a high stake in the business and has a direct say in how the business is going to be run - more appropriate for new smaller businesses with less shareholders/owners present

Advantages:

• potential to raise huge amounts of money

• may offer advice + helps

Disadvantages:

• must give away a part of the business

• different visions of the business