Answer to Question #212081 in English for elisa

Question

Identify and evaluate strengths and weaknesses of various finance generating alternatives a new business may look to.

Answer 1

Advantages of self-financing your business:

• You will know exactly how much is available to run your business and you will not have to spend time trying to secure other forms of funding from investors or banks.
• Self-financing your business gives you much more control than other finance options. It also means that you don't need to pay back or rely on outside investors or lenders, who could decide to withdraw their support at any time.
• You will retain full ownership of the business, which in turn means that you will receive 100 per cent of future profits.
• If you fund a business yourself, you will be forced to live within your means, only investing in business equipment and marketing when you need to. This can help you to prioritise your business expenditure and avoid excessive spending.

Disadvantages of self-financing your business:

• Using your own money to finance your business may put a strain on your family and personal life. You may not have enough money left over to cover your living costs. You should try to leave a contingency fund in case you need extra money to see you through a difficult period.
• If your business were to fail, you could lose your home and other personal possessions.
• Many investors and venture capitalists can also provide mentoring and networking opportunities for you and your business - if you fund your business alone, you will have to develop your own contacts and mentoring opportunities.

Advantages of bank loans

A bank loans money to a business based on the value of the business and its perceived ability to service the loan by making payments on time and in full. Unlike with equity finance where the business issues shares, banks do not take any ownership position in businesses. Moreover, interest on business bank loans is tax-deductible. In addition, especially with fixed-rate loans, in which the interest rate does not change during the course of a loan, loan servicing payments remain the same throughout the life of the loan. This makes it easy for businesses to budget and plan for monthly loan payments.

Disadvantages

The greatest disadvantages to bank loans is that they are very difficult to obtain unless a small business has a substantial track record or valuable collateral such as real estate. Banks are careful to lend only to businesses that can clearly repay their loans, and they also make sure that they are able to cover losses in the event of default. Moreover, Interest rates for small-business loans from banks can be quite high, and the amount of bank funding for which a business qualifies is often not sufficient to completely meet its needs.