Sources of finance (copy)

Internal sources of finance [3]

• retained profits

• owner’s savings

• selling assets

Pros of retained profits

• no financial costs (interest, debt)

• no control/share given up

Cons of retained profit [4]

• risky

—> some months a business may not make profits

• could create conflict with share holders

—> less dividends

• finite amount

—> slow growth

• no expertise added

—> banks

—> shareholders

Pros of owner’s savings [2]

• owner has complete control

• reduces amount needed to be borrowed

Cons of owner’s savings [1]

• limited amount

—> might not last long

Pros of selling fixed assets [3]

• no interest paid

• no control given up

• quick if a buyer can be found

Cons of selling fixed assets[3]

• finite amount of assets that can be sold

• risky if asset is sold for less than the actual value

• business may need to lease the asset back to keep producing their product

—> higher costs long term

External sources of finance

• overdraft

• loan

• trade credit/payables

• share capital

• stock market flotation

• venture capital

• crowdfunding

Pros of overdraft [3]

• quick and simple to organise

• can be tailored to the needs of the business

• no control given up

Cons of overdraft

• higher interest rate than bank loans

• bank can cancel overdraft at any time

• persistent use reduces credit rating

—> less likely to get loan

—> higher interest rate

Pros of loan [4]

• lower interest rate than overdraft

• can tailor to business needs

• frequent repayments may improve credit score

• payments in regular fixed installments

—> can be planned for

Cons of loan

• no flexibility in repayment terms

• if fail to repay credit score worsens

• interest must be paid

Pros of trade payables [4]

• simple to arrange and maintain if credit terms are met

• cheaper form of source of finance

• can sell goods using materials not yet paid for

• can quickly improve cash flow

Cons of trade payables [3]

• risk of ruining relationship with supplier if paid late

• large fine if paid late

• trade credit is at discretion of supplier

—> business may not get credit some months

Pros of share capital

• large sums of money can be raised

• no interest and repayment

Cons of share capital

• more shareholders = more dividends paid

—> lower retained profits

• control may be given up

Pros of venture capital

• no repayments

• reduces personal founder risk

• venture capitalists bring expertise

Cons of venture capital

• they expect high returns on their business

• they may want part ownership of the company

Pros of crowdfunding

• no repayment

• excellent exposure

—> investors want business to go well

—> spread awareness through word of mouth

• investors give feedback / bring expertise

Cons of crowdfunding

• profits are shared

• if the project fails the reputation of the business can be damaged

• investors may have limited expertise