Small Business Reliance on Bank Financing - Assignment Example

The paper "Small Business Reliance on Bank Financing" is a great example of a Finance and Accounting Assignment. The implication of different sources of finance. The different implications which the different sources of finance presents are as Owners Capital: The different advantages and disadvantages are as Advantages: The initial capital need not be repaid.

No interest needs to be paid on the owners’ capital

Disadvantages:

There is a limit to the amount the owner can invest

• Retained Profits: The different advantages and disadvantages

Advantages:

No interest has to be paid on retained profits

Need not be repaid to the business

Disadvantages:

Not available for a new business

The business might not have enough profits which can be used to finance the monetary needs

• Sell of Stock: The different advantages and disadvantages

Advantages:

A quick way to raise finance

Helps to reduce the cost of holding stocks

Disadvantages:

The business will have to sell the stocks at a lower price than the prevailing market price for stocks

• Sale of fixed assets: The different advantages and disadvantages

Advantages:

A good way to raise finance from long term assets which are not required

Disadvantages:

Businesses are unlikely to have huge assets base which is not required

Time is required to raise the required finance from selling off assets

• Debt Collection: The different advantages and disadvantages

Advantages:

No additional cost for the business as the business raises the money from the dues in the market

Disadvantages:

There is a risk that the money raised might impact the overall brand image of the organization

External Sources

• Bank Loan: The different advantages and disadvantages

Advantages:

Predetermined repayments are made at fixed intervals providing an opportunity to make arrangements easily

The interest paid on loan is charged as interest and helps the business to save on taxes

Disadvantages:

The interest paid might be high and lead towards additional cost

Banks might want some assets as security for the loan that is provided

• Additional Partners: The different advantages and disadvantages

Advantages:

The principal amount need not be repaid

Interest need not be paid on the principal amount

Disadvantages:

Dilutes control over business due to more partners

Profits will be divided among more people

• Share Issue: The different advantages and disadvantages

Advantages:

Does not need to be repaid

Interest is not paid on money raised through a share issue

Disadvantages:

Ownership can change hand due to issue of shares

The dividend has to be paid to the shareholders out of the profits

• Leasing: The different advantages and disadvantages

Advantages:

Business can start the use of the assets immediately and carry out their operations

Payments are spread over different intervals assuring that the business has the required time to make arrangements for the finance

Disadvantages:

It is an expensive mechanism to raise finance

The asset belongs to the finance company

• Hire purchase: The different advantages and disadvantages

Advantages:

Business can start the use of the assets immediately and carry out their operations

Payments are spread over different intervals assuring that the business has the required time to make arrangements for the finance (Diamond, 2004)

The asset belongs to the purchaser company

Disadvantages:

It is an expensive mechanism to raise finance

• Mortgage: The different advantages and disadvantages

Advantages:

Business can start the use of the assets immediately and carry out their operations

Payments are spread over different intervals assuring that the business has the required time to make arrangements for the finance (Diamond, 2004)

The asset belongs to the purchaser company

Disadvantages:

It is an expensive mechanism to raise finance

• Trade Credit: The different advantages and disadvantages

Advantages:         

Business can sell the products and pay to the supplying company later

Helps to improve cash flow

No interest is paid on the money which is paid after a certain interval of time

Disadvantages:

Discounts paid on cash payment might not be received

Businesses have to manage their cash flows properly so that the person can be paid the money at the appropriate time

• Government Grants: The different advantages and disadvantage

Advantages:

Need not be repaid back to the government

Disadvantages:

Not all business is eligible for receiving grants from the government thereby limiting their chance of obtaining the required finance

Different appropriate source of finance

World Travel Ltd based on the different sources of finance which have been identified and the different implications which are present can look towards the following options

• Owners Capital: This is the amount that the owner needs to invest in the business from his own sources.
• Bank Loan: World Travel Ltd can look towards raising money from the bank in the form of a loan so that sufficient capital is available and interest needs to be paid on the loan which is taken by the business
• Issue of Shares: World Travel Ltd can look towards raising money from the public in the form of issue of shares so that sufficient capital is available and dividend needs to be paid on the loan which is taken by the business

Findings

World Travel Ltd should look towards raising money from the bank in the form of a loan so that sufficient capital is available and interest needs to be paid on the loan which is taken by the business. The prime reason for raising money in the form of loan is that it will provide the following advantages and disadvantages

Advantages:

Predetermined repayments are made at fixed intervals providing an opportunity to make arrangements easily (Abor & Biekpe, 2007)

The interest paid on loan is charged as interest and helps the business to save on taxes (Abor, & Biekpe, 2007)

Disadvantages:

The interest paid might be high and lead towards additional cost

Banks might want some assets as security for the loan that is provided