Owner's equity- The money that the owner(s) have available to put into the business
Advantages- Does not have to be repaid-no interest
Disadvantages- Starting a business is risky as the owner may lose lose all their savings/wealth
Trade credit- The period of time allowed by a business after supplying another business with goods or services before payment is due, commonly 30 days. In this time the receiving business can use the money internally before finally paying the bill
Advantages- No interest rates
Disadvantages- Limited amounts and only a short term solution-if payment is delayed too long supplier may cut off credit.
Overdraft- A facility from the bank that allows a business to spend more than it has in its account up to an agreed limit. A flexible and useful form of finance that is particularly suited to cash flow problems. Interest is only paid on the amount borrowed and the time it is used.
Advantages- Flexible as the business only has to pay on the amount borrowed for as long as the overdraft is needed.
Disadvantages- Interest charges usually higher than the loan
- Not suited for long term or large amounts
Leasing- A long term rental agreement that allows businesses to use assets without having to pay for them, thereby freeing up funds for other uses. Often used for vehicles, machinery, photocopiers etc.
Advantages- Assets obtained without large expenditure-often with maintenance included
- New modals regularly updated
Disadvantages- More expensive than buying outright in long term
- Assets never yours
- Interest paid regular monthly repayments
Hire purchase- Similar to leasing except that at the end of the agreement the assets become property become of the business.
Advantages- Assets obtained with out large expenditure
- Yours to keep at the end of the rental period
Disadvantage- More expensive than buying outright in long-term
- Interest paid, regular monthly repayments
Loan- The use of someone else's money for a period of time. Usually involves regular repayments and additional payments of interest.
Advantage- Fixed sum available
- Easy to plan for fixed repayments
Disadvantages- Interest paid, regular payments must be made regardless of cash flow
- Usually need security in case of defaulting on loan
Venture capital- Funding provided by a specialist firms or individuals (like Dragon's Den) in return for a proportion of the company's shares. Venture capital investments are seen as relatively high risk because they are unsecured. They also involve a higher rate of interest to compensate for the risk involved.
Advantage- Immediate cash injection
- If given given in exchange for share of business does not need repayment
Disadvantage- They may want share of the business in return for (loss of control for owner) or charge higher rates to compensate for increased risk.
Share capital- Fiance raised by selling shares in the company. This can apply to both private and public limited companies.
Advantages- Immediate cash injection, does not need repayment
Disadvantage- Loss of control as more people own a share of the business
- Need to share profits or make dividend payments
Debenture- A form of external fiance for a business that takes the form of a long term loan often secured on the company's property. It is the business equivalent of a mortgage.
Advantage- Immediate sum available
-repayments spread over a long time
-interest rates can be lower
Disadvantages- Secured against property
- Interest paid
- Regular payments must be made regardless of cash flow
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