Finance
- Submitted by: annie1054
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- Category: Other
- Date Submitted: 11/17/2014 01:07 PM
- Pages: 2
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The Advantages and Disadvantages of Sources of Finance
Internal Sources
Reinvested Profit
+ Profit can provide a return for investors in which investors plough back into business to help it grow.
+ Does not have associated costs.
+ Does not have to be repaid unlike loans.
+ No interest charges.
- May be limited which will constrain rate at which business expands.
Cash Squeezed Out by Day-to-Day Finance
+ Reduces amount needed to be borrowed (cutting stocks, chasing up customers or delaying payments to suppliers).
- Very short term solution.
Sale of Assets
+ Sold to raise cash.
+ Makes sense to dispose of underused assets.
+ Finance development without extra borrowing.
+ They can sale and lease it back.
- Loses assets but has the use of the cash.
External Sources
Bank Overdrafts
+ The firm only needs to borrow only when and as much as it needs.
- Very expensive and bank can insist being repaid within 24 hours.
Trade Credit
+ Good way of boosting day-to-day finance.
- Other businesses may be reluctant to trade with the business if they do not get paid in good time.
Venture Capital
+ Usually want to contribute to the running of the business - bring in new experience and knowledge.
- Requires a substantial part of the ownership of the company.
Finding finance may involve balancing conflicting interests. Internal sources of finance may be too limited to provide opportunities for business development. Obtaining external finance increases the money available, but has its downsides. Borrowing too much can be risky. Raising extra share capital dilutes the control held by existing shareholders.
Having adequate and appropriate finance at each stage in the firm's development will ensure it stays healthy. Decisions about where to obtain the finance will be a matter of considering the business objectives, the stage of development of the the business and the reasons for the funding requirement. A well-run business plans ahead for its financing...
Internal Sources
Reinvested Profit
+ Profit can provide a return for investors in which investors plough back into business to help it grow.
+ Does not have associated costs.
+ Does not have to be repaid unlike loans.
+ No interest charges.
- May be limited which will constrain rate at which business expands.
Cash Squeezed Out by Day-to-Day Finance
+ Reduces amount needed to be borrowed (cutting stocks, chasing up customers or delaying payments to suppliers).
- Very short term solution.
Sale of Assets
+ Sold to raise cash.
+ Makes sense to dispose of underused assets.
+ Finance development without extra borrowing.
+ They can sale and lease it back.
- Loses assets but has the use of the cash.
External Sources
Bank Overdrafts
+ The firm only needs to borrow only when and as much as it needs.
- Very expensive and bank can insist being repaid within 24 hours.
Trade Credit
+ Good way of boosting day-to-day finance.
- Other businesses may be reluctant to trade with the business if they do not get paid in good time.
Venture Capital
+ Usually want to contribute to the running of the business - bring in new experience and knowledge.
- Requires a substantial part of the ownership of the company.
Finding finance may involve balancing conflicting interests. Internal sources of finance may be too limited to provide opportunities for business development. Obtaining external finance increases the money available, but has its downsides. Borrowing too much can be risky. Raising extra share capital dilutes the control held by existing shareholders.
Having adequate and appropriate finance at each stage in the firm's development will ensure it stays healthy. Decisions about where to obtain the finance will be a matter of considering the business objectives, the stage of development of the the business and the reasons for the funding requirement. A well-run business plans ahead for its financing...