Business Finance (2024)

Business Finance

Advantages

• Retained profits: Quick, easy way to raise finance. No interest to pay unlike loans.
• Retained profits are the less risky way of raising finance - loans require security - fixedassetse.g a factory which the bank can claim if interest payments / loan repayments are not met
• Retained profits are the cheapest way to raise finance - no interest and the money doesnot need to be paid back.
• AS Plc is a large business so banks are likely to be willing to lend them money - already have a loan with a French bank

Disadvantages

• Bank loan: May require a set up fee which adds to the costs of raising money using a loan
• The money needs to be paid back with interest
• Interest payments on the loan increase costs, this negatively affects cash flow and profit
• Loans need to be applied for and negotiated
• Retained profits may not be popular with shareholders as it could mean low/no dividend payments for at least a year
• Retained profits may not be enough on their own to pay for the rest of the factory -AS Plc already has a loan from a French bank and is considering increasing bank loans further.
• It will take time beforeAS Plc start receiving any revenue so it could become difficult to start paying off the loan.

Evaluation

Overall, if their is sufficient retained profits to do so,AS Plc should use retained profits because this would be the quickest, cheapest and easiest as well as far less risky way of financing the rest of the construction.