Business Studies – 5.1.2 The main sources of finance | e-Consult
5.1.2 The main sources of finance (1 questions)
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Answer:
Issuing Shares:
- Advantages:
- Access to a large amount of capital.
- No repayment obligation (unlike loans).
- Shareholders may bring expertise and connections.
- Disadvantages:
- Dilution of ownership – existing owners have less control.
- Shareholders expect a return on their investment (dividends).
- Can be time-consuming and expensive to issue shares.
Venture Capital:
- Advantages:
- Significant capital injection.
- VC firms often provide expertise and mentoring.
- Can be a good option for high-growth potential businesses.
- Disadvantages:
- VC firms expect a high return on investment.
- VC firms may want a say in the business's direction.
- Can be difficult to secure VC funding.
Bank Loan:
- Advantages:
- Retained ownership and control of the business.
- Interest payments are tax-deductible.
- Relatively straightforward to apply for (depending on creditworthiness).
- Disadvantages:
- Repayment obligation with interest.
- Requires a good credit history.
- May require collateral (assets to secure the loan).
Evaluation: The best option for Sarah depends on her circumstances. If she is willing to share ownership and has high growth potential, venture capital might be suitable. If she wants to retain control and has a strong credit history, a bank loan is a good option. Issuing shares is suitable if she is comfortable with diluting ownership and has a strong business plan to attract investors.