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Sir in an exam question, it was asked to describe three ways to finance a business and state their advantages and disadvantages .
In your lecture, you spoke about only two methods such Debt and Equity.
You mentioned the short term finance such as bank overdraft, working capital, lease as short term finance etc
while long term finance debt such as Bonds or debenture or loan note.
For Equity you spoke about share capital (ordinary share), preference share and venture capital.
My question now is, according to question above , will i be wrong if i mentioned loan note, equity and lease financing and state their advantages and disadvantages?
Thank you in advance
You are correct in mentioning loan note, equity, and lease financing as three ways to finance a business.Something like:
1. Loan Note:
– Advantages:
– Provides immediate access to funds.
– Interest payments may be tax-deductible.
– Allows the business to retain full ownership and control.– Disadvantages:
– Requires regular interest payments, increasing the overall cost.
– May require collateral or personal guarantees.
– Can create a debt burden and affect the business’s creditworthiness.2. Equity:
– Advantages:
– Does not require repayment or interest payments.
– Investors share the risks and losses.
– Can bring additional expertise and networks from investors.– Disadvantages:
– Dilutes ownership and control of the business.
– Profit-sharing with investors reduces the business’s earnings.
– Investors may have different objectives and decision-making processes.3. Lease Financing:
– Advantages:
– Provides access to assets without large upfront costs.
– Allows for flexibility in upgrading or replacing assets.
– Lease payments may be tax-deductible.– Disadvantages:
– Does not provide ownership of the asset.
– Long-term lease commitments may restrict future financial flexibility.
– Total lease payments may exceed the cost of purchasing the asset.It’s important to note that the advantages and disadvantages may vary depending on the specific circumstances and requirements of the business.
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