Benefits of retained profit?
→ No interest payments to be made on loans
→ Easy access to finance - if it is a bank account it could be accessed the same day, in comparison to a loan which could take longer with all the paperwork
→ Owners keep control
Drawbacks of retained profits?
→ Loss of interest payments on savings should the retained profits be left in a savings account instead
→ Opportunity cost of not being able to use the retained profits elsewhere in the business
→ Profits can fluctuate and so may be an unreliable/irregular source
→ May decrease dividends for shareholders
Benefits of sale of assets?
→ No interest payments to be made on loans
→ Straightforward sale can take place on a number of platforms e.g. ebay
→ Can raise cash quickly - asset can be sold same day
→ Money does not need to be paid back
Drawbacks of sale of asstes?
→ Lose the benefit of the asset e.g. without a van they cannot make deliveries (opportunity cost)
→ May have to spend money advertising
→ May appear less attractive to potential investors and/or lenders
→ May have to complete lots of paperwork for the sale of land/premises
Benefits of owners capital?
→ No interest payments to be made on loans
→ Easy access - the owner may have funds sitting in bank or savings account
→ No complex paperwork and no security needed
→ The owner may take more calculated risks and be more careful when making decisions
Drawbacks of owners capital?
→ Owner mat not have the capital to put into the business and may still need to borrow
→ If the business fails, the owner loses their investment
Advantages of business angels/venture capitalists?
→ Venture capitalist may invest in businesses that banks will not
→ Venture capitalists provide much needed contacts and advice as well as expertise and knowledge
→ Larger sums of money from venture capitalists as there are more of them
→ Could be more reliable due to expertise and therefore more likely to help the business to succeed
→ Business angels allow for a longer repayment period
Drawbacks of business angels/venture capitalists?
→ Owner has to give away equity
→ Could become more expensive than bank if business makes high profits
→Control in business is shares
→ Business angels give smaller amounts
Benefits of peer-to-peer lending?
→ May attract funding that would not normally be forthcoming from bank
→ Interest rates may be lower
→ Repaid in instalments
→ Contributes towards economy if business grows by providing jobs
Drawbacks of peer-to-peer lending?
→ Sites may charge for arranging the funding
→ Interest still usually paid to the lender
→ Rigorous application process and is usually not available for start-ups
What is peer-to-peer lending?
Enables individuals to obtain loans directly from other individuals, cutting out the financial institution as the middleman.
Benefits of crowd funding?
→ Gain finance when banks will not lend
→ No debt or interest to repay
→ Very easy to gain finance and feedback
→ Can create brand awareness
→ Donations do not require to be repaid
→ May raise more than a bank loan
→ Some sites free to use
Drawbacks of crowd funding?
→ May have to give equity
→ Will have to share profit
→ Could be more expensive than a bank loan if the business is very successful
→ Have to create promotional material in first instance to increase probability of securing funds
Benefits of family and friends?
→ No interest
→ Less risky
→ Less pressure to repay instantly
→ May not have to be repaid depending on lender
→ Could help raise cash quickly
Drawbacks of family and friends?
→ Limited amount may be available
→ May strain relationships
→ May be stress in owner of the company - feeling like they owe family
→ May be difficult to ask for money
Benefits of a bank loan?
→ Paid off overtime
→ Fixed, small instalments to repay
→ No equity given away - business keeps control
→Could be large amount of money
→ Could use an overdraft to solve cash flow, providing security for business and reduce risk
Drawbacks on a bank loan?
→ Collateral usually needed to secure loan
→ Has to be repaid irrespective of performance
→ Interest
→ Long application process - cannot be secured quickly
Benefits of share capital?
→ Allows company to raise finance without getting into debt
→ No repayments
→ Dividends
Drawbacks of share capital?
→ Equity in business is lost
→ Dividends payments may be expected
→ Shareholders may want control in the business
→ May turn out to be more expensive than a bank loan if business is successful
Factors to consider when finance sourcing?
Legal structure - some sources, such as share capital, are only available to companies
Cost - some sources have very high interest repayments
Risk - sources that require collateral can be high risk
Flexibility - some sources are highly adaptable to meet the businesses’ precise needs
Causes of cash flow problems?
- overtrading
- allowing too much trade credit
- poor credit control
- in accurate cash flow management
- unforeseen costs
How to speed up inflows?
- incentivise early repayment by giving customers a discount for paying early
- reduce trade credit given to customers
- sell off stock at a discounted price to free up cash
- inject fresh capital into the business
How to slow down outflows?
- delay payments to suppliers
- increase trade credit agreements with suppliers
- cut costs, such as finding cheaper alternatives or postponing spending in areas such as training/advertising
Benefits of cash flow forecasting?
- to support an application for lending (perhaps part of business plan)
- to support budgeting process
- to identify potential cash flow crisis
