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Bringing new shareholders into a small business can add futher expertise. This usually applies
when the additional share apital is being provided by a business angel or venture capitalist
Increasing ordinary share capital can make it easier to borrow more funds from a bank, as the
share capital can help to pay for assets that can be used as collateral.
Ordinary share capital is permanent so teh business will never be required to gather together
sufficient funds to repay it. The money stays permanently in the business.
In profitable yearsm ordinary shareholders will expect good dividends and this is likely to be
more expensice than the interest charged on a loan .
The the original aims of the business may be lost as new shareholders may not have the same
values as the original owners.
As the business grows throoughy this source of finance it is probable that the percentage
shareholding of the original owner(s) will decline. This can ultimately lead to a smaller share of
the profit and even a loss of control of the business.
Providers are known as creditors,.
They charge interes on the loan and must be paid begore any dividends are received by
If a business foes into liquidation the money raised from the sale of its assets must be paid in full
to creditors before any payment is made to the shareholders
o The terms of a bank loan usually specify the purpose, the interest rates and the
o Security is needed such as the deeds to a property.
o Loans usually set for certain time periods so longterm and medium term of finance
The interest rate and therefore the repayments are fixed in advance , making it
easy to budget the schedule for repayments
Interest rrates are normally lower because of the security provided although it is
possible to et unsecured loans at a higher interest charge is the business cannot
Tteh size of the loan and the period of repayment can be organised to match the
exact needs of the firm
The size of the loan may be limited by the amount of collateral that can be
probided rather than by the the amount of money needed by the business
There is less flexilbility in a bank loan , so the business will tend to pay interest
for the agreed perios even if it gets into a position where it can pay off the loan
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It may be possible to repay the loan earlier but often a fee must be paid
for doing this.
Loans are more expensive than alternatives such as personal finance. This is
particularly true for start ups which are charged higher rates of interest because
they are unable to provide the guarantees that the bank prefers.…read more
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o Risky lose savings is business fails
o Not enough savings
Sources of finance
Some sources of finance are short term and must be paid back within a year. Other sources of finance are
long term and can be paid back over many years.
Internal sources of finance are funds found inside the business. For example, profits can be kept back to
finance expansion. Alternatively the business can sell assets (items it owns) that are no longer really
needed to free up cash.…read more
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Grants from charities or the government to help businesses get started, especially in areas of high
Creditors and debtors
A creditor is an individual or business that has lent funds to a business and is owed money. A debtor is
an individual or business who has borrowed funds from a business and so owes it money.
There is a cost in borrowing funds. Money borrowed from creditors is paid back over time, usually with
an additional payment of interest.…read more