Business Studies – 5.1.2 The main sources of finance | e-Consult

Advantages of using Owner's Investment:

• No interest payments: Sarah doesn't have to repay the money with interest, reducing the financial burden on the business.
• Quick and easy access: It's readily available and doesn't require lengthy application processes.
• Demonstrates commitment: It shows Sarah's personal belief in the success of the business, which can be encouraging to lenders.

Disadvantages of using Owner's Investment:

• Personal risk: Sarah is risking her personal savings, which could have been used for other purposes.
• Limited amount: The amount available may be insufficient to fund the entire expansion.
• Potential for personal financial strain: If the business fails, Sarah could lose her savings.

Advantages of using Retained Profit:

• No external borrowing costs: Retained profit doesn't involve interest payments.
• Demonstrates profitability: It shows the business is generating profits and is financially viable.
• Control: The business retains full control over the funds.

Disadvantages of using Retained Profit:

• Opportunity cost: The profit could have been distributed to owners or investors instead.
• May limit future investment: Excessive retention of profit could reduce funds available for future growth.
• Profit may be insufficient: The profit generated may not be enough to fund the entire expansion.

Impact on Financial Position: Using either source of finance will improve the business's financial position by providing capital for expansion. However, using owner's investment increases the owner's personal financial risk. Retained profit demonstrates financial stability but may limit future investment opportunities. A balanced approach, potentially combining both, is often the most effective.