Advantages and disadvantages of external sources of finance

owners capital (pros)

• No interest payments or need to repay

• High level of commitment from the owner

owners capital (cons)

• Amount available is likely to be limited

• If there is more than one owner this could cause friction if everyone is not able to contribute the same amount

loans (pros)

• Regular pre-agreed repayments make planning and budgeting relatively easy

• Ownership or control is not lost

loans (cons)

• Interest is charged on the amount borrowed

• Interest rates can fluctuate

• Often secured against an asset which can be seized if repayments are missed

• Interest has to be paid regardless of whether a profit is being made

crowd funding (pros)

• Offers the ability to raise finance from a large number of investors

• No interest is paid as investors will only be rewarded if the business is successfully sold on at a later date

crowd fuding

• Partial loss of ownership

• No guarantee that the crowd fund will attract sufficient investment to meet the proposal

Mortgages (pros)

• Large amounts of finance can be raised and repaid over a prolonged period of time

• Ownership or control is not lost

mortgages (cons)

• Interest is charged on the amount borrowed Interest rates can fluctuate

• Often secured against an asset which can be seized if repayments are missed

• Interest has to be paid regardless of whether a profit is being made

• Not suitable for small amounts or as a short-term source of finance

Venture capital (pros)

• Finance is provided by a business professional who will often offer advice and mentoring alongside the investment

• Venture capitalists are often risk takers and may see the potential in a high risk investment that other investors including banks may not be willing to invest in

Venture capital (cons)

• Partial loss of ownership and control

• Conflict can arise between the entrepreneur and venture capitalist regarding the direction and day‑to-day running of the business

Debt factoring (pros)

• Speeds up the flow of cash into the business from debts

• The factor company takes on the risk of bad debt

Debt factoring (pros)

• Only receive a percentage of the amount owed, therefore reducing profits

• Can give the wrong impression or alienate customers

Hire purchase (pros)

• Avoids the need to pay a lump sum for the use of an asset

• Regular instalments make planning and budgeting easier

• Spreads the cost of an asset over its useful life

Hire purchase (cons)

• Overall amount paid for the use of an asset is likely to be higher than if purchased outright

• Only really suitable for relatively low cost assets, e.g. vehicles and not premises

Leasing (pros)

• Responsibility for maintaining and repairing the asset stays with the supplier

• Spreads the cost of an asset over its life to avoid paying a lump sum up front

leasing (cons)

• Overall amount paid for the use of an asset is likely to be higher than if purchased outright

• Never actually own the asset and therefore payments are ongoing

trade credit (pros)

• Delays the need to pay for goods and services purchased, therefore aiding cash flow

• No loss of ownership or control

trade credit (cons)

• potential loss of discounts offered for cash payments

• Only suitable as a short-term source of finance

grants (pros)

• No need to repay and no interest charges No loss of ownership or contro

grants(cons)

• Often require a lengthy application process

• Might only be awarded if certain conditions are met affecting the way the business operates on a day‑to‑day basis

donations (pros)

• No need to repay and no interest charges

• No loss of ownership or control

donations (cons)

• Likely to be small amounts only

• Unpredictable

peer to peer lending (pros)

• Interest rates can be lower than lending from more traditional financial institutions

• Fixed rate of interest can be agreed making it easier to plan and budge

peer to peer lending (cons)

• Amounts available may be limited and provided for a short period of time only

invoice discounting (pros)

• No need to repay and no interest charges

• No loss of ownership or control

• Reduces costs to the business so increases profit

invoice discounting (cons)

• Often only available if purchases are paid in cash which affects cash flow