AQA AS Business Studies - Sources of Finance

Applied Business Studies Revision

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  • Created on: 03-01-13 09:04

Sources of Finance

1. Using your own savings;

Advantages:
- It shows you have faith within the business that it will be successful in the future.
- this encourages banks to give you a bank loan because it acts as security and encourages them to believe they will get thier money back.
- It also encourages Investors to invest within your business

Disadvantages:
- Not all entrepuneurs will have enough money to cover all the costs when starting up a new business. They will need to use additional sources as well.

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Sources of Finance

2. Loans

A loan is when you borrow a fixed amount of money and pay it back over a fixed amount of time with interest.

Advantages:
- You are guarenteed the money you are given, the banks cannot demand it back at any time.
- You don't have to share any of your business with the bank or give them a share of any profits. You just have to pay back the money borrowed and the interest.
- The interest charges are lower than for an overdraft.

Disadvantages:
- They can be difficult to arrange because the bank needs security for the loan i.e a property or any assets you own. If you do not have this, you may not get a loan.
- Keeping up with payments can be difficult, if you can't pay it back in time, the bank will sell what you used for security to pay off what you borrowed.
-You may have to pay a charge if you pay it back early.

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Sources of Finance

3. Friends & Family

They can borrow money from friends and family.

Advantages:

- They will be more flexible with when you pay them back.
- They are unlikley to ask for security for the loan.

Disadvantages:

- If the business fails the lender will loose thier money and the relasionship between the lender and the entrepuneur may be ruined.

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Sources of Finance

4. Overdraft

An overdraft is when a bank lets you spend more than you already have in your account.

The overspend is recorded as a negative figure.

This source of finance is good for covering day-to-day costs, but not for long term costs.

Advantages:
- It's quick and easy to set up, banks will offer them to most people.
- They are flexible, you can borrow any amount of money up to the limit and only have to pay interest on what is borrowed.

Disadvantages:
- Banks can demand the money back at any time, even if you can't afford to pay them back.
- The interest is high.

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Sources of Finance

5. Selling Shares

If the business is a Private Limited Company (PLC), they can sell shares within the business to friends, family or professional investors to finance thier business.

The disadvantages of this would be that when they sell shares within the business, they also have to share part of the business with the shareholders and give them a say in decisions and share part of the profits earned.

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