3.2 Sources of Finance

What are personal funds?

Money invested by the owner from their own savings.

What is an advantage of personal funds?

No interest or repayment; full control maintained.

What is a disadvantage of personal funds?

Limited by the owner’s personal wealth; high personal risk.

What is retained profit?

Profit kept in the business after costs, tax, and dividends.

What is an advantage of retained profit?

No interest or repayments; cheap and accessible.

What is a disadvantage of retained profit?

Only available if profitable; may reduce dividends to shareholders.

What is the sale of assets?

Selling unused or non-productive assets to raise cash.

What is an advantage of selling assets?

Generates quick cash and frees up storage/maintenance costs.

What is a disadvantage of selling assets?

May reduce productive capacity; asset is permanently lost.

What is share capital?

Finance raised by selling shares of ownership in the company.

What is an advantage of share capital?

Raises large amounts; no repayment required.

What is a disadvantage of share capital?

Loss of ownership/control through dilution; dividends expected.

What is loan capital?

Borrowed money repaid with interest over a period of time.

What is an advantage of loan capital?

Suitable for long-term investment; ownership retained.

What is a disadvantage of loan capital?

Interest increases costs; collateral often required.

What is an overdraft?

A short-term loan allowing a business to withdraw more than it has.

What is an advantage of an overdraft?

Very flexible; useful for short-term cash-flow problems.

What is a disadvantage of an overdraft?

High interest rates; bank can demand repayment at any time.

What is trade credit?

Buying goods now and paying for them later.

What is an advantage of trade credit?

Improves short-term cash flow; no immediate payment.

What is a disadvantage of trade credit?

Loss of early payment discounts; supplier relationships can suffer if late.

What is a grant?

Non-repayable funds given by governments or institutions.

What is an advantage of grants?

No repayment; reduces financial burden.

What is a disadvantage of grants?

Strict eligibility criteria; competitive to obtain.

What is a subsidy?

Financial support from the government to lower production costs.

What is an advantage of subsidies?

Reduces costs → lowers prices; encourages desirable activities.

What is a disadvantage of subsidies?

May become dependent on government support; taxpayers fund cost.

What is debt factoring?

Selling accounts receivable to a factoring company at a discount.

What is an advantage of debt factoring?

Immediate cash flow improvement.

What is a disadvantage of debt factoring?

Business receives less than full invoice value.

What is leasing?

Renting assets instead of purchasing them.

What is an advantage of leasing?

Lower upfront cost; maintenance often included.

What is a disadvantage of leasing?

Long-term cost is higher; asset is never owned.

What is venture capital?

High-risk investment from specialist firms into high-growth potential businesses.

What is an advantage of venture capital?

Can provide large finance + expertise.

What is a disadvantage of venture capital?

Requires giving up significant ownership/control.

What are business angels?

Wealthy individuals investing personal funds into startups.

What is an advantage of business angels?

Provide mentoring + early-stage finance banks won’t offer.

What is a disadvantage of business angels?

High expected return; loss of equity and some control.

What is microfinance?

Small loans given to low-income individuals or very small businesses.

What is an advantage of microfinance?

Increases financial inclusion; helps start microenterprises.

What is a disadvantage of microfinance?

Small amounts only; high administrative costs.