External source of finance

‘Short term’

 Overdrafts:
o Bank agrees to lend a business up to an agreed limit as when
required.
o It is the most flexible form of all sources of finance as it can vary
from day to day
o Often taken for short period of times e.g. when consumers are
delaying their payments
o However
 Usually carries high interest rates
 Bank can call in the overdraft and force the firm to pay it
back if the bank becomes concerned about the stability of
the consumers
 Trade credit:
o Involves delaying the payment of bills for goods and services and
thus in effect obtaining finance (as it is as good as lending money)
o However discounts for quick payments and supplier confidence is
lost

 Debt factoring:
o Selling of claims over debtors (that is invoices) to a debt factoring
company in exchange of immediate finance.
o However, the entire amount will not be received and also the firm
might seem to look desperate.