Business Studies – 5.1.1 The need for business finance | e-Consult
5.1.1 The need for business finance (1 questions)
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Bank Loan vs. Share Issue: Key Differences
Both bank loans and share issues are methods of raising finance, but they differ significantly in terms of ownership, risk, and financial implications.
| Feature | Bank Loan | Share Issue |
| Cell |
| Ownership | No ownership is given up. The business retains full control. | Ownership is shared with investors. The business owner gives up a portion of the company. |
| Cost of Finance | Interest charges. The interest rate can vary depending on the business's creditworthiness. | No direct interest payments. However, profits are shared with shareholders. |
| Risk | The business is responsible for repaying the loan, regardless of profitability. This creates financial risk. | The business is not obligated to repay the money. However, profits are reduced due to the share distribution. |
| Advantages | Retains full control of the business. Interest payments are tax-deductible. | Access to a larger amount of capital. No repayment obligations. Can bring in valuable expertise and connections. |
| Disadvantages | Requires a good credit rating. Can be difficult to obtain a loan. | Dilution of ownership. Shareholders have voting rights and can influence business decisions. |
Conclusion:
The best option depends on the business's circumstances. If the business wants to retain full control and has a strong credit rating, a bank loan might be preferable. If the business needs a large amount of capital and is willing to share ownership, a share issue might be a better option. The business must carefully weigh the advantages and disadvantages of each method before making a decision.