Business Finance. There are a number of sources of finance, which businesses will need in order to start up a new business, make their business expand and buying materials required for their business.

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AO1 Finance Unit 3                                                                    Umerah Bhatti 12BCG

Mr Burns

AO1 Unit 3 Finance

There are a number of sources of finance, which businesses will need in order to start up a new business, make their business expand and buying materials required for their business.

- Mortgage: A Mortgage is a source of finance that is used to help fund purchase of a property. This is a very long-term method of borrowing money which requires some form of security. The money will later have to be paid back to the bank along with interest. If this money is not paid back there are people who are known as bailiffs who will come to your house to repossess the belongings needed to pay off the mortgage taken out. Mortgages can be borrowed by Company, Building society or Bank.

Advantages

 The Advantages of this method are that the interest charges tend to be lower than other sources of finance. Also you can take out the money for long period of time, this can be easier for a business because it’ll give them a chance to set up and keep the business running and then later on if the business becomes successful and makes a lot of money, and they can then pay off the mortgage which was taken out.

You can Retain Ownership; this means instead of raising funds by selling a share in the property or the business to an investor you retain complete ownership. There is also Tax Advantage because interest expenses on your mortgage are tax deductible and are made with pre-tax money.

Disadvantages  

The Disadvantages using this method are that the longer you take to return the money, the higher the interest rate. Another disadvantage is that if the mortgage is not paid back, debt collectors will repossess your belongings so that you can pay back the mortgage.

-Bank Loan: A Bank Loan is an amount of money borrowed from the bank and then has to be repaid with interest on or before a fixed date. Bank loans are taken out for a fixed period, banks would want some form of security to certify that the bank loan is paid back including interest along with it. A bank loan is usually taken out for a purpose e.g. borrowing money to start up a new business, providing new equipment for their company, buying stocks, buying new products to sell in your business, even buying shares or using the money to invest in the business. This is comparable with mortgage because with a bank loan you also have to pay back the money along with interest.

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Many business owners who need financial help in their business will go to the bank straight away to take out a loan, but most businesses that become unsuccessful or bankrupt will find it difficult to pay back the money which had been borrowed and will then be in debt. If the business is then in debt they will have to find a way to pay back the bank, if they are unable to pay the debt they will then have to talk to the bank to ask for them to allow the business more time to return the money along ...

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The writer is confused over the difference between a loan and an investment in the business. The disadvantages of the owners capital discussed above are actually disadvantages of getting new shareholders and this is not otherwise discussed. Other sources of finance are ignored e.g. venture capitalists who specialise in investing in new businesses