Sources of Finance

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Unit 2: Business Resources

Assignment 4:P4

Sources of Finance

Internal Sources of finance

Owners’ savings- the owner of a business often has to use their own personal savings to start a business, particularly if they are a sole trader. This is because banks may not be willing to take a risk and invest in them. Savings are a good source of finance for a business, as interest does not need to be paid to someone else while the money is being used, and the business remains totally in the control of the owner. In any business venture it is always an advantage to be using your own money because the freedom of spending it how you please is up to you, however there is a high risk factor with personal savings, the chance of losing owners savings is typically high especially if a small business. Owners savings could be used for fixed and start up costs.

Capital from profits- once a business is operating it may be able to invest the money that it makes as profits back in the business. This means that even greater profits made be made in the future. The amount of profit to invest back in the business- or in new business- will depend on how much profit the owner(s) want to keep for themselves against how much they want the business to expand. For some business it is not possible to use capital from profits- for example, if they are a charity or a not-for-profit organisation. Using profits made as capital is very beneficial for the banking side of business because it is money earned so no need for a higher loan or to us an external source of finance. An obvious disadvantage is the shareholders possible view on capital reinvestment, although it is vital from company growth and increasing their share of the market the shareholders might believe they deserve money for their investment before growth. This can cause many problems in the work environment although it is the ethical decision.

External Sources of finance

Banks- banks are able to offer loans, business accounts, commercial mortgages and overdraft facilities based on the business plan. Interest is payable based on predicted risk. Some security will need to be provided, for example assets such as a house. Using a Bank as a source of finance is always an easy option the reason for this is the fact that they hand out money, they assess the risk of giving you money and plan out repayments and set interest rates. A disadvantage to using a bank as a source of finance is if the business venture liquidated your personal assets are at risk.

Building societies- Business societies are also able to offer loans, business accounts, commercial mortgages and overdraft facilities based on the business plan. Interest is payable based on the risk of the venture. As with banks, some security will need to be provided, such as assets. As with banks the advantages are the same using these sources of finance however they are more sensible with their money also there is a smaller chance of the bank falling into deficit. I assume with building societies that obtaining money may be harder than banks maybe because there is not as much money internally as banks have.

Hire Purchase- Hire purchase means that resources can be used by the business while they are being paid for to a finance company. Until the last payment is made on the agreement, the goods are not owned by the business, and if payments are not made the finance company can take them back. There are many advantages of hire purchase but the obvious benefit of this is if machinery for everyday business operations is out of reach hire purchase is a vital option and it also allows a business to spend its money more efficiently. However if the repayments were unaffordable in any stage of the hire the finance company and seize the hired goods and all the money spent on finance repayments would be lost and make the hire a complete loss.

Leasing- Leasing means that a business can make use of resources and pay to use them every...