Methods of financing a business. What are the advantages and disadvantages? Need Help!!!?

Question

I have a homework question asking for the four methods of financing and the advantages and disadvantages of each. The four methods are:

1. Use personal funds
2. Use retained earnings
3. Borrow
4. Issue Shares of Stock

I am having a hard time obtaining advantages and disadvantages. Any ideas???? Please help!

Answer 1

1: Use personal funds: No interest charges: Opportunity cost because you cannot invest elsewhere and personal liquidity declines
2. Use retained earnings: No interest: Deplete net worth of company, increasing leverage which decrease company flexibility to obtain additional debt from lenders. Also decreases company liquidity that could be needed to absorb decline in sales etc...
3. Borrow: Obtain $$$ from outside to preserve company and personal liquidity. Interest charges and fixed expenses for debt repayment increases.
4. Issue Shares of Stock: Get $$$ from outside investors. No interest and preserves personal and company liquidity. Dilutes ownership and could lose some measure of control.

Answer 2

1. Use personal funds
Advantages: You're in control. You're emotionally and physically invested.
Disadvantages: You could lose that money. You're in control. You're emotionally and physically invested.
2. Not sure what "retained earnings" means
3. Borrow
Advantages: You're in control of the money you receive. You don't have to come up with all of the money. You can get money up front and pay it back later.
Disadvantages: Interest rates mean you're paying more in the long run than if you used personal funds. If your business fails, you will almost always still have to pay that money back.
4. Issue shares of stock
Advantages: The burden of responsibility is spread throughout a group. Each member of that group is emotionally and physically invested in the success of your business.
Disadvantages: As an owner, you have less control. You might be ordered or highly encouraged to do something by your shareholders that you don't want to do. You will usually have to pay your shareholders dividends and other monies so that they're getting a return on their investment. If you decide to sell the company, it will be more complicated than if you were the sole owner.

Answer 3

Read the chapter of your text book. I'm sure the answers are there.

I would think you could imagine what the answers might be just from common sense as well.

Borrowing and issuing shares of stock are good for cash flow, but create obligations.

Using retained earnings is bad for cash flow but doesn't create obligations.

Using personal funds isn't so good for your personal account but if you're the sole owner, then it may be a good investment for you.

Answer 4

Assuming you have studies about these different forms of credit, look at each one and simply do what it says on the tin. Explain the pros and cons of each method and decide what is the best way for Jane to finance her business. If you don't know what each form of credit is, google it, or look through your class notes. x