Sources of finance
- Created by: ofields755
- Created on: 28-03-17 09:46
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- External Sources of Finance
- Bank Overdraft
- Short-term
- bank allows a business to overspend its current account to an agreed limit
- Useful for seasonal businesses which are likely to experience some cash flow problems
- interest rates are higher than a loan
- intended as a source of short term finance but can extend to a longer period which will cost the business more money
- Business loan
- Medium/ long term
- typically used to buy new machinery
- repayable after 3 to 10 years
- assets are used as a security for the loan
- = if the repayments are not met, they are then sold
- very costly compared to other sources
- there will be fees for the business if they wish to repay early
- Mortgage
- Long term
- Provided by the bank in order to buy property
- only method available to buy property
- includes structured repayments over a long term (25 yrs)
- large sums of interest charged
- can take a long time to repay debt
- Hire Purchase
- allows a business to use an asset e.g. computer without having to pay for it all initially
- Involves paying an initial deposit and regular payments for a set period of time
- Businesses can have the use of up to date equipment immediately
- payments are spread over a period of time - good for budgeting
- when repayments are made the business will own the asset
- this is an expensive method compared to buying it with cash
- Share Issue
- Involves issuing more shares
- Doesn't have to be repaid
- No interest is payable
- profits will be paid out as a dividends to more shareholders
- Ownership of the company could change hands
- Leasing
- Allows a business to obtain assets without the need to pay a large lump sum up front
- It is arranged through a finance company
- Businesses can have the use of up to date equipment immediately
- Payments are spread over a period of time which is good for budgeting
- can be expensive
- the asset belongs to the finance company
- Trade credit
- summed up by the phase - 'Buy now pay later'
- business can sell the goods first and pay for them later
- Good for cash flow
- No interest charged if money is paid with agreed time
- Discount given for cash payment would be lost
- businesses need to carefully manage their cash flow to ensure they will have money available when the debt is due to be paid
- Government Grants
- Gov. organisations such as Invest NI offer grants to businesses
- Dint have to be repaid
- Certain circumstances may apply e.g. location
- Not all businesses may be eligible for a grant
- Additional Partners
- Suitable for a partnership business
- the new partners can contribute extra capital
- Doesn't have to be repaid
- No interest is payable
- Diluting control of the partnership
- Profits will be split more ways
- Bank Overdraft
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