Finance in the Hospitality Industry Assignment Example | Topics and Well Written Essays - 4250 words

Finance in the Hospitality Industry - Assignment Example Owner’s capital, however, is in most cases limited since the sole trader may not have adequate savings to finance capital expenditure. Ploughing back profits involves re-investing the income from the business. Profits for reinvestment are readily available in the business provided the business earns profits. The opportunity cost of reinvesting capital is lower compared to other sources of capital (Fields, 2011). Ploughing back profits will help the sole trader avoid the huge costs of interest paid on bank loans and leasing of the required machinery. The only disadvantage of this source of capital is that it is not always available, especially during periods when the business is not making the profit. Banks provide short-term, medium-term and long-term finances to the businesses. Banks will finance all asset needs of the trader including working capital, equipment and machinery. Bank loans are usually readily available sources of capital expenditure (Fields, 2011). This is because banks are always ready to invest in businesses in terms of providing the loan to earn interest. Another advantage of banks is that they offer some degree of flexibility such that the borrower can pay off the loan early and terminate the contract to avoid accumulation of interest (Drury, 2003). Banks, however, require huge interest rates and collateral, which limits the accessibility of these finances. This implies that the sole trader will need to work hard in order to generate enough cash flow to cover the interest payments and return the principal. Additionally, banks will require assurance of payment by requiring personal guarantees and secured interest on personal assets. Friends and relatives can support sole traders when establishing business enterprises. They can provide finances for buying capital goods. As a sole trader, I can either receive the full some for buying the required machinery or contribute a proportion of the  £50,000.  Ã‚