Essays on Small Business Reliance on Bank Financing Assignment

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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        

References

Abor, J., & Biekpe, N. (2007). Small Business Reliance on Bank Financing in Ghana. Emerging Markets Finance and Trade, 43(4), 357-395

Diamond, D. (2004). Financial Intermediation and Delegated Monitoring. Review of Economic Studies, 51, 393-414

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