Owner’s Savings

This means money the owner has personally saved to invest into the business. Only used by sole traders.

Advantages

The business does not go into debt to anyone
It allows the owner to keep control of the business without bringing in other

Disadvantages

If the owner needs to access the money it can be difficult to withdraw it
The owner risks losing their investment if the business fails

Partnership Capital

This means money each partner brings to the business when forming or joining a partnership.

Advantages

The business does not go into debt to anyone
The business can raise more money by inviting people to become partners

Disadvantages

The profit will need to be shared between more people
If there are disagreements and a partner leaves, they will take their capital with them

Selling Shares

This means inviting people to purchase a ‘share’ of the business in return for a share of the profits. This is only available to Private Limited Companies.

Advantages

Shareholders have limited liability
Share capital does not need to be repaid

Disadvantages

It can be expensive to issue shares
It is difficult to estimate how much each share should be sold for

Bank Loan
Sum of money given by the bank to be paid back in instalments with interest

Advantages

Quick and easy to set up
Can be repaid over a long period of time

Disadvantages

Interest could be expensive

Loans from Family/Friends

Sum of money lent by family and friends to be paid back at an agreed time, generally without interest.

Advantages

No interest to be paid

Disadvantages

Arguments over the borrowed money might occur

Government Grants
Sum of money given by the government to an organisation for specific purpose.

Advantages

Does not need to be paid back

Disadvantages

Usually has conditions attached
Can take time to get as requires may forms to be completed

Bank Overdraft
A business can agree with the bank that it can take out more money than it actually has in its account.

Advantages

Easy and quick to arrange for a short period of time

Disadvantages

Usually only for a small amount of money
Daily charges and/or interest applied

Hire Purchase

Purchasing machinery/equipment by paying the cost of the item plus interest in equal instalments.

Advantages

Can receive the immediately without paying

Disadvantages

Interest could make the item expensive
Item not allowed until all payments made

Mortgage
Large sum of money given by the bank linked to property.

Advantages

Can be taken out over a long period of time i.e. 25 years

Disadvantages

If interest rates change, repayments might increase.

Retained Profit
This is when companies keep back their profits from previous years of savings, and can then use them when they need large sums of money.

Advantages

The money does not have to be paid back to anyone
No interest need to be paid

Disadvantages

It can take a long time for companies to save up the large amounts of money needed to grow or expand

Trade Credit
This is when firms buy goods from suppliers, but do not have to pay until a later date.

Advantages

This makes it easier for the officer to manage the cash flow – when money come into or out of the business

Disadvantages

The office may lose out on their prompt payment discount
If they pay late than 30 days, the stationery supplier may be reluctant to sell them any more stationery

Factoring

It can take time and effort for a business that has issued invoices to collect in money it is owed. Small companies can therefore find it in more effective to sell its invoices to another company who specialise in collecting payments

Advantages

They receive the money quickly and do not have to employ someone to chase up unpaid bills

Disadvantages

The company selling the invoices will sell them at a lesser value and thus do not get the full amount owed

Venture Capital

This is a large sum of money invested by someone other than a bank – like dragons’ den! Venture capitals will often provide finance when banks decide a loan is too risky.

Advantages

Can be useful to entrepreneurs with new ideas

Disadvantages

Venture capitals will often charge high fees or demand a part-ownership of the company in exchange for their finance

Next up

Previous

Sources Of Finance