Sources Of Finance: Business Ownership And Sources Of Finance (Copy)
5.2.1 Business Ownership And Sources Of Finance
The Relationship Between The Form Of Business Ownership And Availability Of Sources Of Finance
- Sole Trader
- Characteristics: Owned and run by one individual, unlimited liability.
- Sources Of Finance:
- Personal savings.
- Loans from friends and family.
- Bank overdrafts or small loans.
- Trade credit.
- Limitations:
- Access to large-scale finance is restricted due to lack of collateral and high risk.
- Investors reluctant to fund due to unlimited liability.
- Example: A local grocery shop owner mainly using savings and small bank loans for funding.
Written and Compiled By Sir Hunain Zia, World Record Holder With 154 Total A Grades, 7 Distinctions and 11 World Records For Educate A Change AS Level Business Full Scale Course
- Partnership
- Characteristics: Owned by two or more people, may have unlimited liability.
- Sources Of Finance:
- Combined personal savings of partners.
- Bank loans (more security due to shared ownership).
- Partner contributions (increasing capital).
- Trade credit.
- Limitations:
- Still limited access to large-scale finance due to risk of unlimited liability.
- Dependence on trust and agreement among partners.
- Example: A law firm partnership pooling partner funds for expansion.
- Private Limited Company (Ltd)
- Characteristics: Limited liability, shares not sold to the general public.
- Sources Of Finance:
- Retained profits.
- Sale of shares to family/friends.
- Bank loans (safer due to limited liability structure).
- Leasing and hire purchase.
- Limitations:
- Restricted share transfers → finance availability limited to close investors.
- Still less attractive to large-scale institutional investors compared to PLCs.
- Example: A family-owned manufacturing firm raising funds by issuing shares privately.
Written and Compiled By Sir Hunain Zia, World Record Holder With 154 Total A Grades, 7 Distinctions and 11 World Records For Educate A Change AS Level Business Full Scale Course
- Public Limited Company (PLC)
- Characteristics: Limited liability, shares traded publicly on a stock exchange.
- Sources Of Finance:
- Issuing shares to the public (equity finance).
- Issuing debentures (long-term loans).
- Retained earnings.
- Bank loans and overdrafts.
- Venture capital and institutional investors.
- Advantages:
- Access to large-scale finance from global markets.
- Strong credibility and transparency attract investors.
- Limitations:
- High regulatory and reporting requirements.
- Risk of hostile takeovers due to public share trading.
- Example: Apple or Microsoft raising billions through share issues.
- Franchises
- Characteristics: Entrepreneurs buy the right to use an established brand’s name and systems.
- Sources Of Finance:
- Franchisee’s personal savings.
- Bank loans (franchise brands seen as lower risk).
- Franchise fees and royalties paid to franchisor.
- Example: McDonald’s franchise owners financing outlets through bank loans supported by franchisor reputation.
Written and Compiled By Sir Hunain Zia, World Record Holder With 154 Total A Grades, 7 Distinctions and 11 World Records For Educate A Change AS Level Business Full Scale Course
- Co-operatives
- Characteristics: Owned and operated by members for mutual benefit.
- Sources Of Finance:
- Member contributions.
- Retained surpluses.
- Government grants in some cases.
- Limitations:
- Limited access to external finance as investors may be less attracted to shared ownership structures.
- Example: Agricultural co-operatives pooling member funds for investment.
Strategic Importance Of Ownership And Finance Links
- Ownership type directly affects:
- Risk: Unlimited vs limited liability.
- Control: Whether investors influence decision-making.
- Finance Options: Scale of finance accessible (local loans vs international capital markets).
- Sole traders/partnerships rely on personal and bank finance, while PLCs access vast funding through stock exchanges.
- Strategic growth often requires transition:
- Example: A successful private company converting to a PLC to fund international expansion.
Written and Compiled By Sir Hunain Zia, World Record Holder With 154 Total A Grades, 7 Distinctions and 11 World Records For Educate A Change AS Level Business Full Scale Course