Business Studies

Is the money given to a company by shareholders in return for a share certificate. This gives them part ownership of the company and entitles them to a share of the profits.

Advantages:

• Limited liability encourages shareholders to invest in the business, as it restricts the amount of moeny they can lose.
• It is not neccessary to pay shareholders a dividend if the business cannot afford these payments.
• Bringing new shareholders into a small business can often mean that further expertise is bought into the business.
• Increasing ordinary share capital can make it easier to borrow more funds froma  bank, as the share capital can purchase assests that can be used in collateral.
• It does not need to be re-paid so eases the pressuree on a limited company

Disadvantages:

• In profitable years, ordinary shareholders will expect good dividends and this is likely to be more expensive than the interest charged on a loan.
• The original aims of a business may be lost as new shareholders may not have the same values as the original owners.

Loan cpaital is money recieved by an organisation in return for the organisation's agreement to pay interest during the peroid of the loan within an agreed time.

A bank loan is a sum of money provided to a firm or an individual by a bank for a specific, agreed purpose.

Advantages:

• The interest rate and thus the payments are fixed in advance, making it easy to budget the schedule for repayments.
• Interest rates are usually lower because of the security provided.
• The size of the loan and the peroid of repayment can be organised to match the exact needs of the firm.

Disadvantages:

• The size of the loan may be limited by the amount of colateral thta can be provided rather than by the amount of money needed by the business.
• It is often difficult or costly to repay a loan early.
• Start-ups are often charged higher rates of interest because they are unable to provide the guarentees that the bank manager might like.

A bank overdraft is when a bank allows an organisation to overspend its current account at the bank up to an agreed (overdraft) limit and for a stated time period.

Advantages:

• Theya re extremely flexible and useful for temporary cash-flow problems.
• Interest is only paid on the amount of the overdraft being used.
• They are particulary useful to seasonal businesses, which are likely to experience some cash-flow problems at certain times of the year.
• Security is not usually required.

Disadvantages:

• The interest rate charged is usually higher than for a loan.
• Banks can demand immediate repayment.

Venture capital s finance that is provided to small or medium sized businesses that seek growth, but which may be considered as risky by typical share buyers or other lenders.

Advantages:

• Venture capital is available to firms that are unable to get finance from other sources because of the risk involved.
• Venture capitalists sometimes nallow interest or dividends to be delayed.
• Venture capitalisy may provide guidance and and advice.

Disadvantages:

• Venture capitalists often wants a significant share of the business in return
• Venture capitalists often wants high interest payments or dividends.
• It is possible that venture capitalists will exert too much influence, so the original owner may lose their independance.

This is money that is provided by the owner or owners of the business from their own savings or personal wealth.

Advantages:

• A cheap source
• It enables the owners to keep control over their business.

Disadvantages:

• A person can quickly lose their savings.
• The entreprenuer may not have sufficient savings to finance a new business.

Examples:

• Mortgage
• Private borrowing from friends
• Selling private assets