Sources of Finance

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Direct Sources of Finance ­ ACCN3
Different Sources of Finance
Bank Overdraft
Features A bank overdraft is a flexible agreement with a bank which allows a
customer to borrow money on a current account up to a certain limit.
Interest is paid ­ normally at a variable rate in line with market rates.
An overdraft limit is normally reviewed with the business every year.
An overdraft is repayable on demand if the bank wants the money
repaid.
Security will be repaid from the business or the business owner to
safeguard the borrowing.
Advantages A bank overdraft is very flexible: a business can borrow and repay
whenever it likes.
An overdraft can be economical to operate: interest is only payable
when the business borrows, and is only charged on the borrowed
amount.
Disadvantages Interest rates for bank overdrafts can be higher than bank loan rates.
If the business gets into financial difficulties the bank can ask for
immediate repayment of the overdraft.
Security, including possibly the house of the business owner, is requires
for an overdraft.
Bank Loan
Features A bank loan is a finance provided by the bank for a specific purpose,
often used for the purchase of an asset.
Interest is paid, either at a rate fixed at the beginning of the loan, or at
the variable rate in line with the market rates during the lifetime of the
loan.
A bank loan is for set period of time, normally between 2 and 30 years.
The loan is often repaid in regular instalments, but this may varied. Some
loan can also be repaid in full at the end of the loan period rather than by
instalments.
Security either the assets being purchased or the property of the
business owners is required for a bank loan.
Advantages A bank loan is easy to budget for because of the timing and the amount
of the repayments is known.
There may be flexibility in the repayment schedule, for example delay in
early repayments.
Favourable interest rates can be negotiated, often at a lower rate than
an overdraft.
Disadvantages A business loan is a long term financial commitment which will need to be
serviced.
Security, including possibly the house of the business owner is needed.
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Direct Sources of Finance ­ ACCN3
Mortgage
Features A mortgage is an agreement, in which a property is used as security for
borrowing. If the borrower defaults in the loan, the lender can sell the
property to obtain the funds.
Banks can provide finance for purchase of commercial property,
normally up to 70% of the commercial value. In principle a mortgage is
basically the same for a business as it is for a house buyer.…read more

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Direct Sources of Finance ­ ACCN3
Disadvantages If outside investors buy into the company by acquiring ordinary shares,
they will have an element of control of the company which could prove
disruptive for the existing management.
With most shares, the finance is never `paid off' as it is a fixed term loan
or overdraft as there will always be the need to pay dividends.…read more

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