ADVANTAGES OF EACH SOURCE OF FINANCE AND THEIR DISADVANTAGES

1. PERSONAL SAVINGS

Personal savings is money that is put aside by an individual for non-immediate use.

Situations where personal saving is the right source of finance

 When one loses his job abruptly without consent.

Advantages of personal savings.

 The savings can cover emergencies hence give you peace of mind.
 The savings can cover loss of emergencies e.g. During the covid 19 times many jobs
were lost and those who had personal savings were at a good advantage and could start a
new business on their own.
 Personal savings can earn interest.
 Personal savings also increase net worth.
 Personal savings prevent interest expenses.
 One can become financially independent
 Reduce the risks of debts.
 Big life purchases.

Disadvantages of personal savings

 Low interest rates when compared to huge investments companies

 Savings accounts have federal limits while withdrawing.
 Easy access and availability makes or brings temptations of spending the money hence
becomes a long term liability.
 Rates can change. This means financial institutions e.g. banks can change rates as they
with. High interest accounts will stay largely with the movements of the federal rate.
 Inflation .Your saving account should pay a competitive interest rate or else inflation
would take all the money you saved.

2. PATNER CONTRIBUTIONS

In business and partnership law, contribution may refer to capital contribution, which is an
amount of money or assets given to a business or partnership by one of the owners or partners.

Situations where partner contributions become the right source of finance

 When taking risks

 When making decisions.
Advantages of partner contributions

 High capital is easily acquired to start a business.

 Better decision makings
 You will have a better borrowing capacity
 Easy to change your legal structure
 Partner business affairs are private
 Two heads are better than one.

Disadvantages of Partner contributions

 Waste of time in decision making.

 Profits are shared among the partners.
 If a partner leaves you will probably have to value all the assets which can be costly.
 There is always a risk for disagreement
 Each partner is jointly liable for partner debts.

3. SHARE CAPITAL.

A share capital is the money a company raises by issuing a common stock. Or it is money raised
by company in sales of shares.

Situation where share capital becomes the right source of finance

 It also helps to raise the prestige of a company

 One can quickly gain a lot of capital.

Advantages of share capital.

 No repayment required.
 Lower risk
 It brings in equity in partners

Disadvantages of share capital.

 Ownership dilution
 Higher cost to start
 Takes time and effort to establish.

4. RETAIL EARNINGS
They are important concept in accounting referring to the historical profits earned by a company
minus any dividends it paid in the past.

Situation where retained earnings becomes the right source of finance

 It is a cheap source of finance.

 There is no interest in payment of fees.
 They can also increase my future earnings.

Advantages of retained earnings.

 They are easily accessible.

 It eliminates any losses incurred.
 There will be no dilution of control and ownership.

Disadvantages of retained earnings

 Improper utilization of funds if retained earnings is not clearly stated and may lead to
careless spending.
 Over capitalization.
 Retained earnings do not allow shareholders to enjoy full benefit of actual earnings.

5. SALES OF ASSETS.

This means the business selling some or all its assets.

Situation where sale of assets becomes the right source of finance.

 When cash is needed urgently.

 When one wants to create space for more profitable uses.

Advantages of sale of assets

 No liabilities to the employees.

 Costs paid for assets are depreciable.
 No legal liabilities for cooperation loan credit reputation. Before purchase. If a new
owner comes in he will be not liable to any debts.

Disadvantages of sale of assets.

 Rehiring of employees The employees will be employed again by the new owner not just
automatically.
 New licenses since that will start a fresh.
 Must pay sales tax on furniture, fixtures and equipments.
  Must negotiate transfer of leases and contracts since the new owner will be starting a
fresh.
 No established credit.Srarting new business becomes hard to get credits.

6. VENTURE CAPITALIST

They are businesses people with surplus income willing to invest in business with great potential
for profitability.

Situation where venture capitalists becomes the right source of finance

 It is also a valuable source of guidance and consultation.

Advantages of Venture capitalist.

 Allows opportunity for expansion since it does not require collateral unlike the banks.
 Valuable guidance and expertise
 Huge network for connection for business which can be advantageous for businesses with
startups to grow.
 No obligation for repayment if the shut up fails or shut down hence does not leave burden
to payback
 Venture capitalists are trust worthy.
 Easy to locate.

Disadvantages of venture capitalists

 Dilution of ownership and control

 Long and complicated process
 They take long time to start.
 Approaching them can be tedious.
 May require high return on original investment
 May release funds from time to time

7. CREDIT SUPPLIERS

They are willing to give you products on credit after value of product.

Situation where credit suppliers becomes the right source of finance

  They can help with cash flow as they allow you to sell the products you receive from
suppliers.

Advantages

 A guaranteed supply of goods.

 Industry insights and trends
 It can increase your credit worthiness.
 Enjoy trade discounts.

Disadvantages of Credit suppliers.

 High costs
 Effect on your credit rating.
 Cash flow difficulties.

8. BORROWING FROM BANKS

Situation where borrowing from banks becomes the right source of finance

 Flexibility. The bank will not provide you with guidelines on how to use the money.

Advantages.

 Bank loan is temporary.

 Interest tax is deductable.

Disadvantages.

 Tough to qualify for being loaned since they look at a lot of things e.g. collateral.
 High interest rates.
 Limited growth potential since one is required to pay in a timely manner.
 Lose of assets.
 Inability to increase debt.

9. BORROW FROM MICRO FINANCES.

They operate as main stream banks.

Situation where borrowing from micro finance becomes the right source of finance

 Flexibility
Advantages

 Quick disbursal of loan.

 Extensive portfolio of loans.
 Self sufficiency and entrepreneurship.
 Collateral free loan majority of Micro finance companies does not seek any collateral for
providing credit.

Disadvantages

 Harsh repayment method.

 Small loan amount
 High interest rates.

10. SAVINGS AND CREDIT SOCIETIES.

They only offer loans if you are a member and has been a member for six months.

Situation where savings and credits becomes the right source of finance

 Limited liability
 Easy to form

Advantages

 Easy to form.
 Open membership.
 Democratic management.
 Limited liability.
 Government patronage.

Disadvantages.

 Limited capital.
 Inefficient management.
 Absence of motivation
 Differences and factionalism among members.
 Lack of secrecy among members.

11. GOVERNMENT GRANTS.

They are funds from the government if you are willing to go with the government projects.

Situation where government grants becomes the right source of finance

 Free money

Advantages

 Free money
 Accessible information
 Gain credibility

Disadvantages

 Time consuming
 Difficult to receive.
 Uncertain renewal.
 Strings attached

12. ANGEL INVESTORS.

They are business people that have finances and they support business with a chance of
profitability or potential of profitability.

Situation where angel investors becomes the right source of finance

 They offer assistance both in capital and also with experience which motivates you as a
person to start your business.

Advantages of angel investors.

 They come with their experience to support their startups.

 They are mostly interested in businesses within their line of specialization.

Disadvantages of angel investors.

 Less transparent.
 Control by angel investors hence one cannot operate freely.