Describe the major sources of finance available to businesses, and the advantages and disadvantages of each source.

In this assignment I am going to describe the major sources of finance available to businesses, and also give the advantages and disadvantages of each of the source. Before explaining the major sources of finance available to business, advantages and disadvantages, I am going to list or give the type of sources of finance available to organisation and also tell you the reason why business need finance.

Sources of finance available to business

Overdraft: This is when the customer borrows from the bank by taking out more money than they have in their bank or When the amount of money withdrawn from a bank account is greater than the amount actually available in the account the excess is known as an 'overdraft' and why the account is said to be 'overdrawn’. This is a short-term credit for replenishment of current.

Advantage

The advantage of this is that you can get the exact amount you need. When you have unplanned expenses or run short on cash you can take overdraft which will help you to solve some little problem. It provides the finance when a business needs to pay creditors or meet other short-term bills

Disadvantage:

The interest pay is too expensive. The bank can withdraw the facility at any time your money come into the account without telling you. Interest will be charged according to the amount overdrawn and the time involved.

Loans

This is when a person borrows money from a financial institution or other type of lender with an agreement to pay back the full amount plus interest over a period of time. Loans are usually guaranteed with assets like a vehicle or home. Until the loan is paid off, the lender will have a lien on these assets and has the right to repossess them if the terms of the loan are not met.

Advantage

The advantage of this is that the banks will offer a wider range of loans, and repayment may be made by instalments for as long as 20 years. The interest rate is not high as it is only 6%, which is not bad.

Disadvantage

The Disadvantage of this is that the bank would make sure that the borrower had sufficient security in case the loan could not be repaid so that they can take the borrower assets. Another disadvantage with loans is that the longer the loan last normally is due to the amount of money you borrow, this means at interest rates will be added to the monthly payment you will be paying the loan company.

Mortgage

This is money borrowed from a lender in order to purchase a piece of property. This is varying in terms of length as well as interest rates.

Advantage

The advantage of this is that there is the period to pay back is very long as it is a long term which gives the businesses time to pay the money back installments over the 25 years this is an advantage as the business will be using the property whilst paying installments were they can carry on with their business work to make more profit this is also ...

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Mortgage

This is money borrowed from a lender in order to purchase a piece of property. This is varying in terms of length as well as interest rates.

Advantage

The advantage of this is that there is the period to pay back is very long as it is a long term which gives the businesses time to pay the money back installments over the 25 years this is an advantage as the business will be using the property whilst paying installments were they can carry on with their business work to make more profit this is also another clever way to expand their businesses by having more property to distribute their products

Disadvantage

The disadvantage of this is that the loan can only be given on certain asset so the

collateral used is restricted. Another thing is that they are not very flexible type of

financial source as they can only be used for the property purchases. The interest is

not that high as it is about 4% but because you take it up to 25years before paying,

then them money will be massive that you will have to pay.

Trade Credit

This is when one provides goods or services to a customer with an agreement to bill them later, or receive a delivery or service from a supplier under an agreement to pay them later. This can also be viewed as an essential element of capitalisation in an operating business because it can reduce the required capital investment to operate the business if it is managed properly. Trade Credit is a short-term form of finance obtained by buying goods and services that do not require immediate payment.

Advantage

One of the advantages of using trade credit is that it is often available to businesses on a relatively informal basis without the requirements for application, negotiation, auditing, and legal assistance frequently necessary with other capital sources.

Disadvantage

The disadvantage of this is that it must be used judiciously. Its easy availability is particularly welcome in short periods for limited needs. Used imprudently, however, it can lead to the loss of key suppliers and it may jeopardize your ability to locate other, competitive suppliers who are willing to extend credit to your business.

Leasing

Leasing is known as a contractual agreement whereby someone or a company is granted the use of some capital asset for a specified time in exchange for an agreed upon payment amount. A lease can be favourable compared to outright purchasing due to different payment. Leasing is an efficient way to obtain a property to run a business to create more money and pay off the rental fee for the property.

Advantage

The advantage of leasing is that if a business used this type of finance, it wont have to pay the full amount of money for the property as they only have the use of the property for a limited amount of time, which means that all the fixed costs that are meant to be paid for the property will be paid by the owner of the property except if not declared in the contract leaving the business with just the rental fee and other minor costs such as electricity to run the business. This will be less expensive because the building money has been paid already.

Disadvantages

The disadvantage of this is that there can be problems when leasing properties at the end of the leasing terms as the company may have to leave the property except they have come to negation of extended time. Leasing is only a temporary solution to run a business from and at the end of the day the property is never yours.

Inheritance

This is the tradition of passing on property, titles, debts, and obligations upon the death of an individual. This has long played and an extremely vital role in human societies.

Advantage

The advantage of this is that it is free

Disadvantage

The disadvantage is that the money or wealth might not be enough.

Family and Friends

This is known as getting money from friends and family for your business. This can be long term because to repay back can be any time.

Advantage

The advantage of using family and friends money for a business is that it is free.

Disadvantage

The disadvantage is that it might not be enough and may take control of the business.

Savings

Savings is when you put money aside, for example, by putting money in the bank or investing in a pension plan. Outside of economics, saving is typically used to refer to economizing, cutting costs, or to rescuing someone.

Advantage

The advantage of using savings money for a business is that it is free.

Disadvantage

The disadvantage of using savings money for a business is that it might not be enough money to use, as they will need more capital.

Venture Capital

This is Money used to support new or unusual undertakings; equity, risk or speculative investment capital. This funding is provided to new or existing companies, which exhibit potential for above-average growth. Venture capital can be anything from seed money to full financing and sources include wealthy individuals, limited partnerships and business investment companies.

Advantage

The advantage of using venture capital for your business is that you will receive a fair amount of money you need for your business to grow.

Disadvantage

The disadvantage of using this for your business is that you will lose control of part of your business because since the venture capital has help you to finance your business they would like to take an advantage of making decisions in the company.

Equity from sale of shares

This type of finance is another importance source of finance, which allows people and other businesses to buy a small fraction of their business for a set sum; this is a good way to create internal money within a business. Shares are a very long-term source of finance, which brings in money, which is normally used for structuring and strengthening businesses assets.

Advantage

This source of finance is a good way to obtain financial back up which can strengthen a businesses financial stability as it give large amount of money and it is cheap.

Disadvantage

The disadvantage of this is that shares sold could resolve in the business losing control of its operations.

Bond

A bond is another source of finance that is used by businesses as a type of finance for business trade. Bonds are used as a type of finance because they are easy and cheap way to gain money.

Advantage

The advantages of bonds is that they can be bought for a set amount of money and can be bought back by the same seller for an increased rate depending on the rate agreed. This is an advantage as the buyer of the bonds gets a slight increase of money when they are purchased back and unlike certain shares and loans bonds value will not decline or rise vividly due to the interest.

Disadvantage

finding the people to get the money from might be difficult. Also another disadvantage of bonds is that once sold to the buyer the seller will then have to buy back the bonds for a slight increase due to interest.

Grants

Grant is a financial assistance in the form of money, or property or technical assistance in lieu of money, awarded by a government agency or private organisation (foundation or corporation) to an eligible applicant to accomplish some public purpose.

Advantage

The advantage of grants is that the money is given to the business to use to support them with their business. This is an advantage of this source of finance as it supports a business so that it can function effectively.

Disadvantage

The disadvantage of grants is the requirements and rules to be meet to qualify for the payment.

Asset Sales

This is another source of finance whereby previous products which have been purchased by a business can be sold in order to make money for a businesses expansion or ordering of new products that are in season. Sales of assets normally occur near the end of the year like near Christmas time or early in the year in January.

Advantage

The advantage of this is that you could use the profit made to invest into another asset. Another advantage of asset sales is that stock that is not needed by the business will be moved through this action which will give room within stock rooms for new potential products and it is also a prompt way to obtain money.

Disadvantage The disadvantage of this is that the value might not be obtained from the sale. Another disadvantage is that the business will be selling their products for a cheaper price which will result in them not maximising their profit to its original target. Sales of assets can also be seen as a way of shrinking businesses financial status as they are selling their products for a cheaper price which means they are not maximising their cash income.