Two suitable sources of finance for this company are share capital and a mortgage. Here's a comparison of their advantages and disadvantages:

Share capital is suitable if the company is willing to share ownership and believes that new shareholders can contribute to its growth. However, it dilutes existing ownership. A mortgage is a good option if the company has assets to secure the loan and can afford the regular repayments. It avoids diluting ownership but creates a financial obligation.

Working capital is the difference between a company's current assets and its current liabilities. It represents the funds available for day-to-day operations. A company can use working capital as a source of finance by effectively managing its current assets and liabilities. This involves optimizing the levels of inventory, receivables (money owed to the company), and payables (money the company owes to others).

Components of Working Capital:

Importance of Managing Working Capital Effectively:

• Ensures smooth operations: Sufficient working capital allows the company to meet its short-term obligations (e.g., paying suppliers, employees).
• Avoids financial difficulties: Adequate working capital reduces the risk of insolvency.
• Improves profitability: Efficient working capital management can reduce costs (e.g., storage costs for inventory) and increase sales.
• Enhances creditworthiness: A healthy working capital position makes the company more attractive to lenders.

When selecting a source of finance, a new small business owner must carefully consider several key factors. These factors significantly impact the suitability and affordability of different options.

Size of Business: A small business typically has limited assets and a shorter track record compared to larger companies. This makes securing bank loans or attracting investment more challenging. They may be more reliant on personal savings, loans from friends and family, or government grants.

Legal Form of Business: The legal structure (sole trader, partnership, limited company) affects the owner's personal liability and access to finance. Limited companies are often viewed as more creditworthy than sole traders, making it easier to obtain loans or attract investors. Sole traders may find it harder to secure finance.

Amount Required: The total amount of finance needed dictates the available options. Small amounts might be covered by personal savings or overdrafts, while larger sums necessitate bank loans, venture capital, or equity financing.

Length of Time: The duration for which the finance is required is crucial. Short-term needs might be met with a short-term loan or overdraft, while long-term investments require mortgages or long-term loans.

Existing Loans: Existing debt levels impact the business's ability to take on further finance. High existing debt may limit borrowing capacity and increase the risk of default.

Cost of Finance: The interest rate and associated fees are vital considerations. Different sources of finance have varying costs. Bank loans typically have interest rates, while equity financing involves giving up a portion of ownership.

Purpose of Finance: The intended use of the funds influences the best source. Capital expenditure (e.g., purchasing equipment) often requires a loan or investment, while working capital (e.g., covering day-to-day expenses) might be better suited to an overdraft or short-term loan.

In conclusion, the business owner needs to weigh these factors carefully to find the most suitable and cost-effective source of finance. A thorough analysis of each option is essential to ensure the long-term financial health of the business.