business: finance

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  • Finance
    • long term
      • debentures - long term borrowing with the promise of repaying the amount lent with a set amount of interest
        • very structured method which allows the business to know how much debt has to be paid back at the end
        • usually secured onto assets of the business such as property, if the debt isn't paid the debenture holder will claim the property
        • no longer a popular method of finance for businesses
      • bank loan- an amount of money is borrowed from the bank, then repaid over a set period of time
        • easy to set up and large amounts of money can be borrowed with a structured repayment term
        • interest is payable, if repayments aren't kept up the business risks getting a poor credit rating or becoming bankrupt
      • issuing shares- a share in the business is sold, this money is used to purchase new assets
        • no need to repay money invested, cheaper than a loana nd some business can raise large sums of money this way
        • need to repay the shareholder a share of future profits and its risky for the shareholder, the investment may be lost if the business fails
        • ownership also means some influence over how the business is run- the original owner may lose control
      • mortgage - long term loan provided by a bank in order to buy property
        • only method available to buy property, structured repayments over long term
        • large sums of interest charged and can take a long time to repay debt
      • government grants =- money given to a business by the government, used to help finance new projects
        • no need to repay the grant
        • limited funds available, may be restrictions on what the money can be used for
      • hire purchase- an item bought on finance, repayments are made
        • flexible method - can hand back the item if no longer required and payment will stop
        • high interest often charged, item doesn't belong to the business until the end of term
      • venture capital - venture capitalists invest in small, risky businesses e.g. new business start-ups
        • can raise money from them even when banks have refused to lend to a business
        • risky for the venture capitalist, the vc may want some control over the business
    • short term
      • selling assets - items owned by the business are sold
        • the business has to have something worth selling
        • the business is using money it already has so no need to take out a loan or pay interest
        • the business may sell something they later need
      • overdraft - drawing more money from the bank than the account holds
        • very quick to arrange
        • a good short term solution to a cash flow problem
        • only suitable for smaller amounts and has to be repaid in a short amount of time with interest
      • retained profit - money kept in the business by the owners
        • no need to pay interest
        • could have been invested elsewhere, earning a higher profit
        • may not have enough retained profits and shareholders may become unhappy if it means lower dividend payments for them
      • owner's funds - money put into the business by the woner
        • no need to pay interest
        • could have been invested elsewhere, earning a higher profit
        • owner may not have enough funds to meet the needs of the business
      • trade credit - items are bought from suppliers on a 'buy now pay later' basis
        • gives the business more cash to use in the immediate future
        • can only be used to buy certain goods, bills have to be settled in 30,60 or 90 days
      • debt factoring - the company sells a debt to a debt factoring company who pays the business a smaller sum than they were owed
        • allows the business to get money for debts that might not have been paid
        • saves the business time chasing customers
        • time consuming and the business receives l;ess money than it was originally owed
      • leasing - used to help obtain new equipment, the business rents items from the owner
        • cost of the assets is spread over its life and there's no need to find a lump-sum of money to purchase it
        • may be more expensive than buying the asset, the owner will want to make a profit
        • the business does not own the asset so it does not appear on the balance sheet

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