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Advantages and Disadvantages of the various sources of finance available to businesses.

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Extracts from this essay...

Introduction

Advantages and Disadvantages of the various sources of finance available to businesses. Mortgage Advantages Disadvantages Retained Ownership Instead of having to raise funds by selling a share in the company to an investor, you can keep current ownership of the company. The lender is only entitled to an interest return on its mortgage, not a percentage of the profits or a share in the company that an investor would expect. High Risk Having a mortgage, would mean that the loan would be secured on your premises. If you don't meet payments, the lender can sell the property to repay any outstanding money owed leaving you in trouble. Tax Advantage Interest payments on your mortgage are tax deductible and are made with pre-tax money. Defaults The lender may outline a various things that will constitute a default on the mortgage, not just failing to make any payment on time, but liquidation, insolvency and breaches of any obligations in the mortgage agreement. Better Cash Flow A mortgage gives you access to capital that you would not normally have access to, with minimal up-front payments. Also you can normally set a repayment plan to suit the needs of the business.

Middle

You will have to invest management time to provide regular information for the investor to monitor. Investors are often prepared to provide follow-up funding as the business grows. There can be legal and regulatory issues to comply with when raising finance, eg when promoting investments As both a pro/con, shares in the business will be diluted. However, they may be of a much larger business because of the funding. Hire Purchase hire purchase is a medium term funding facility, which cannot be withdrawn by the lender, provided the business makes the payments as they fall due. It may not either be possible or could be very costly to terminate a contract / finish early. Businesses can gain immediate use of the asset without having to pay a large amount for it or without having to borrow a large amount. Even though the asset is not owned by the business, if it was damaged and broken, the business would still have to pay it off aswell as having to replace it. Generally, payments are fixed so a business will know at the beginning of the agreement what their repayments will be making cash flow easy to manage.

Conclusion

This type of finance does not need to be paid back as it is the businesses own money it has saved from profits, so there are no terms and conditions on the use and no interest charges as it has not being borrowed. If a business used all of its retained profits to develop expansion and it was unsuccessful, then the business has no money to fall back on and could end up being a waste of time and money spent Debentures The business retains ownership and control, the debenture holder does not hold any rights to manage the business. Debenture holders get fixed interest income; this is even if the company has no profits. Interest paid to debenture holders is a tax deductable expense. Normally for financing a single asset, the debenture holder has a legal interest in that asset and the company cannot dispose of it unless the debenture holder agrees. Fixed interest rate usually for the entire duration of the loan and could be lower than leading bank loans. Very long term loan. If a company has a good amount of credit security, it can easily meet its long term financial needs with debentures. Debenture holders are preferential creditors and will be entitled to the repayment of some or all of their money before dividends are paid to the shareholders.

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