AO1: Kn: State to possible ways of financing
AO2: Ap & An: Provide a detailed explanation
The first method that can be used to set up their business is their own savings, this is beneficial as there would be no interest charged on this money, however if the business does not do well they would have lost their money. They could also ask friends and family to invest in the business although to do this they would need to set up as a private limited company.
The car wash machine will cost around £15,000 , john and Jackson have left themselves the choice of: (12 marks)
- Borrowing £15,000 from Jackson’s father, for which he would want a shareholding
- Borrowing £15,000 from a 5 year bank loan, secured on the machine
Discuss the advantages and disadvantages of each possible source. Recommend which would be best. Give reasons for your answer.
AO1: Kn: show understanding of the different sources of finance
AO2: Ap & An: discuss the advantages and disadvantages of both methods
AO3 / 4: Ev: making a judgement – which one is better and why.
Borrowing the money from Jackson’s father would be beneficial because there would be no interest on the loan and the money could be obtained easily and quickly allowing them to get on with starting the business, they also may not need to pay the money back immediately which will help initially with cash flow. However, if the father has put a large amount of money into the business he will in time expect a share of the profits which will mean less profit for John and Jackson. In addition to this Jackson’s father may also expect a say in the way they should run the business and this could lead to disputes. Borrowing the money from the bank could be beneficial as unlike Jackson’s father the bank will not interfere in how the business is run and although the money will need to be paid back once the loan has been paid back the bank would not expect any future payment from the profits that are made. However the bank loan will have to be paid back with interest, if the interest rates rise then the monthly payments will increase this can have an effect on cash flow as suddenly the business outgoings could be more than in comings and therefore no cash running through the business for buying supplies, this can have a very negative effect on the business. Also if the business is not successful and does not make any profit the loan will still have to be paid back to the bank, they may have to sell off their assets and personal belongings especially if they are a partnership with unlimited liability. With this in mind I think it would be better in the first instance for them to borrow the money from Jackson’s father because although this may lead to less profits for each of the owners and possible disputes it is less risky until the business is up and running and proves to be a success. The cash flow problems associated with interest payments on loans could force them out of business.