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Advantages & Disadvantages of Finance Sources

Updated April 17, 2017

Not all sources of finance are equally reliable or appropriate for your particular needs. Sole-proprietorships, partnerships, and corporations, the three major classes of business organisations, have different abilities to handle large quantities of debt and different capabilities to attract amounts of equity. In general, the three major sources of finance to consider are bank loans, private and public equity investments, and refinancing of personal assets.

Bank Loans

Bank loans are a standard method for acquiring capital for a business or personal venture. The major advantages of bank loans are the fixed interest rates (if you look for them) and the dependability that the bank will not and cannot ask for its money back unless you violate the terms of the loan agreement. The disadvantage is that all bank loans are debt obligations, and if you do not anticipate being able to pay back the debt in a reasonable time frame, then loans may be inappropriate for you. Not paying back a loan in a timely fashion can wreck your credit rating and massively increase your overall debt load.

Private and Public Equity

Private and public equity are different, but equally important sources of finance. If you finance your business or personal venture with private equity, then you will be legally indebted to those particular private investors; however, private equity investments are less regulated than public equity ones, allowing you greater flexibility with your use of the equity. Public equity, which is received after an IPO (Initial Public Offering) of a firm, is another useful way to capitalise your venture; however, public companies face greater financial regulation, disallowing them from making some of the more risky financial ventures of the past.

Extracting Finance from Personal Assets

Refinancing your mortgage, if you are a homeowner, can provide you with a major source of capital; however, if your venture fails, you may end up unable to afford your home. Alternative, but related, sources of finance would include selling your investments (e.g. stocks and bonds) or retirement plans (e.g. a 401 (k) or Individual Retirement Account). The obvious risk is that you are essentially betting your future on your present if you choose to take this route.

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