Advantages and disadvantages of selected sources of finance


Advantages and disadvantages of selected sources of finance


  • Overdrafts: a flexible way of funding day to day requirements
  • Interest is only payable on actual amount borrowed
  • Debt factoring: allows businesses to receive cash almost immediately
  • May reduce a business's overdraft
  • Bank loans: can be negotiated
  • Managers can plan for repayment
  • Mortgages: ideal for long term products
  • avoid the owner losing control over business
  • Retained profits: free source of finance
  • do not involve loss of control
  • Share capital: Can be used to raise large amounts of capital
  • Company not committed to fixed interest payments
  • Venture capital: can bring expertise into the business
  • avoids having to pay interest on the entire amount of finance
  • Crowdfunding: can be relatively cheap
  • increasing relevance as banks reduce short loan lending


  • Overdrafts: interest rates are high
  • bank may ask for repayment at any time
  • Debt factoring: Can reduce a businesses profit margin
  • Customers could lose faith in suppliers
  • Bank loans: They are inflexible
  • May be required to offer collateral
  • Mortgages: Managers will have to offer property as collateral
  • They may have to pay interest
  • Retained profits: the owners of the profits may want them
  • The business may lose out on alternative investments
  • Share capital: only available to companies
  • existing owners may lose control
  • Venture capital: may not want them involved in decisions
  • usually only able to raise small amount of finance
  • Crowdfunding: unfamiliar source
  • may not be suitable to raise a lot of capital


The influences: 1. The business's legal structure2. The cost of the source of finance3. Flexibility4. Control5. The purpose for which the finance is needed




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