Sources of Finance for Business: Pros and Cons

Sources of Finance for line of credit Pros and ConsSources of FinanceFinance is essential for a line of businesss, development and expansion. Finance is the core factor for most businesses and therefore it is of import for businesses tomanage and maintain their financial re lines better. Finance is useable to a business from avariety of sources both internal and external. It is also crucial for businesses to choose the most appropriate source of pay for its several needs as different sources sustain its throw benefits and embodys. Sources of finance arse be classified based on a number of factors and the can be classified as Internal and External, Short- full term and Long-term.Identify the sources of finance usable to a businessWorking capital owners finding that are invested into business from the beginning to financeoperation. Liability willing be created in shape of capital.AdvantagesSince it is an internal source offinance there are no lives involved and no repayment is needed.DisadvantagesOpportunity costs are involved.Is not suitable forlong term investments.Working capital cannot raise large amounts of funds.Total risk is undertaken by the follow.victimization working capital as a source offinance will affect the current ratio of the business. depository financial institution Overdraft occurs when gold is withdrawn from the bank account and the availablebalance goes below zero. There are different bank charges which aredepending on the agreement.AdvantagesThis is a good way to coer the uttermost between money going out of and coming into a business.If used in the short-term it is ordinarily cheaper than a bank bring.Disadvantages affaire is repayable on the amount overdrawn crapper be expensive if used over a longer period of time.Mortgage this is a loan secured on property repaid in instalments over a long time around25 years. The business will own the property once the final payment has beenmade. This is a long-term source of finance .AdvantagesBusiness has the use of the property.Payments are spread over a period of time which is good for budgeting.Once all repayments are made the business will own the asset.DisadvantagesThis is an expensive method compared to buying with bills.If business does not keep up with repayments the property could be repossessed.Bank loan This is a fixed amount for a fixed short time with fixed repayment. The intereston this loan can be expensive.AdvantagesSet repayments are spread over a period of time which is good for budgeting.DisadvantagesCan be expensive ascribable to interest payments.Bank may require security on the loan.Hire purchase occurs when buyer is paying for things or items in fixed instalments whileusing the item.AdvantagesBusinesses can have the use of up to date equipment immediatelyPayments are spread over a period of time which is good for budgetingOnce all repayments are made the business will own the asset.DisadvantagesThis is an expensive method compared to buying with cash. job Credit it is a system that allows buying something now and paying letter. For manybusiness trade credit it is essential for business to growth.AdvantagesBusiness can convey the goods first and pay for them laterGood for cash flowNo interest charged if money is paid within agreed time.DisadvantagesDiscount tending(p) for cash payment would be lostBusinesses need to carefully manage their cash flow to ensure they will have money available when the debt is due to be paid. judicature Grants this organisations offer grants to businesses, both established andnew and normally there are some conditions apply.AdvantagesDont have to be repaid.Disadvantages legitimate conditions may applyNot all businesses may be eligible for a grant.Factoring is a financial transaction that occurs whereby a business sells its accounts due to a third part at a discount.AdvantagesA large proportion of money isreceived within a short time-frame.The sales ledger of the business can be ou tsourced to the factor.The money collections from debtors are undertaken by the factoring company.Helps a business tohave a smooth cash flow operation.Non-recourse factoring protects the client company from bad debts.DisadvantagesThe business has to pay interests and fees for the factor for its run.The cost will be areduction on the companys pull in margin.Analyse the costs of different sources of financeWorking capitalTangible cost They do not have any costs as it owner money that will be invested to inception a business.Opportunity costs Could have borrowed extra if the working capital is not enough from relatives, friend.tax income effects This can be repay when the profit will rise.Bank OverdraftTangible cost Interest is a little higher than forbank loans and interest is calculated on a daily basis. This is short term and quick source of finance which is not pay on time extra and large interest charges will apply.Opportunity costs Could have borrowed from relatives or friend to avoid extra charges or to feel into debts. appraise effects It can be deducted when the business is increasing asset.MortgageTangible cost Interest rates apply as agreed in monthly instalments over a long time usually for 25 years.Opportunity costs Could have borrowed from family to avoid the interest fees. evaluate effects The property will be possessed by the organisation if monthly payments are not meet.Bank loanTangible cost Interest to be paid on the sum borrowed at agreed rate. Interest is usually fixed forshort term loans, and long-term loans usually have a variable rate of interest. Interest rates are lower than for bank overdrafts.Opportunity costs Could have borrowed cheaply from relatives or friends.Tax effects Interest is tax deductible from profit before we arrive at profit figure for tax purpose.Hire purchaseTangible cost The business ends up paying more than the original value of the asset for its purchase and the interest has been paid in equal instalments.Opportu nity costsTax effects Interest charges can be offset against profits for taxation.Trade CreditTangible cost If paid on time there is no financial cost involved, however if not paid on time the interest will apply automatically.Opportunity costs Working capital and friends.Tax effects own possession of goods can be removed by the debt organisation or sale or rent to cover the interest cost.Government GrantsTangible cost Government grants are free and have nofinancial costs.Opportunity costs Could have borrowed from relatives or friend as there are no legal agreements involved.Tax effects No financial costs are involved.FactoringTangible cost The business must pay interests and fees for the factor for its services the interest is calculated on a dailybasis, credit management and administrative fee are also chargedand ranges.Opportunity costs Working Capital will be a better alternative or relatives and friends.Tax effects The business must pay interests and fees for the factor for its services and the cost will be areduction on the companys profit margin.Evaluate appropriate sources of finance for a business projectThere are several sources of finance available to a business on the market. Finances are needed for many and different purposes need sources offinance which are most suitable. When choosing a most appropriate source of finance some conditions have to be considered. The conditions that need tobe considered when choosing an appropriate source of finance areThe amount of money neededThe urgency of fundsThe cost of source of financeThe risk involvedThe duration of financeThe gearing ratio of thebusinessThe control of the business proposalHair and Beauty Business ProjectInspiration aims are to be the first beauty salon in the local area which will deliver unique and quality service by offering high standard beauty products which will quickly gain market share.Inspiration will provide customers with a relaxing and comforting line which will help them to en joy the service provided to gained high reputation.Building Mortgage long term which will be payable for 25 years.Personnel Bank Loan short time with fixed repayment 3-5 years.Furniture and stationary etc. Working Capital owners finding that are invested into business.Brochures Overdraft short-term it is usually cheaper than a bank loan.Advertisement Bank Loan Set repayments, spread over a period of time, interest high.Others Relatives or friends.These loans will be paid from the cash flow from the business and will be collateralized by the assets of the company on short-term or long-term agreements with the lenders.