• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

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

Extracts from this document...

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. ...read more.

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 Hire Purchase hire purchase is a medium term funding facility, which cannot be withdrawn by the lender, provided the business makes the payments as they fall due.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. ...read more.

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. ...read more.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our AS and A Level Accounting & Financial Management section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related AS and A Level Accounting & Financial Management essays

  1. A2 Business CourseWork

    Reducing costs is very important because it means that profits are increased. Increasing profits is at the very core of every business. Tesco will try to do this by investigating the current way they are doing things and consider investing in new things which may save money and reduce time.

  2. Assignment 4: ethical issues. The community. P4 and M3

    Child labour: This issue has been raised earlier on this assignment. Investigations were carried out concerning the use of child labour within Primark. Now in the UK this is an illegal activity, there are specific age groups that are allowed to work and there is also a set amount

  1. Sources Of Finance

    Public limited companies have shareholders like a private limited company but the difference in ownership is that any individual can buy shares on the stock exchange. There for any one can have ownership of the business even if they have no experience in running one, this may be an disadvantage

  2. Dear Ms C Walsh, Im writing to inform you about ...

    You have no fairness until you decide to purchase the equipment at the end of the lease term, at which point the equipment may have criticised suggestively. http://www.bizhelp24.com/money/business-finance/leasing-in-business-3.html * Factoring Factoring is a quick and easy way of turning your invoices into cash.

  1. Finance, cash flow and insolvency

    associated with running a business as a sole trader, the main one being that it is much easier to raise Finance. Once you start to trade as a partnership business, banks will be keener on loaning out money as they are aware of the fact that all the partners will be providing finance to run the company.

  2. Sources of finance for a new business.

    This is a long-term loan, often 25 years, from a bank or another financial institution secured on the assets of the business. Securing a loan against fixed assets means if the business cannot meet its loan repayments, the fixed asset is sold and the loan paid off.

  1. Edecel Applied Business Unit 11 Finance Task B

    = 0.7:1 By looking at the current ratio we can see that for every euro of debt/current liabilities it has 60cent of current assets which are stock, cash and debtors. This doesn't appear a situation for Thomas Cook as they can't afford to clear its short term debts with its current assets.

  2. Advantages and Disadvantages of Credit Cards

    Today, everyone likes to shop online instead of going to overcrowded stores and wait on line to check out. It is impossible to make a purchase over the phone or the Internet without a credit card. Consequently, more and more people carry a credit card with them.

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work