COLLEGE OF BUSINESS EDUCATION (CBE) DARESSALAAM CAMPUS

INDIVIDUAL ASSINGMENT (TFC)

COURSE: BACHELOR DEGREE IN BUSINESS ADMINISTRATION

SUBJECT: BUSINESS TECHNIQUES

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Questions

1.With correct examples discuss all internal and external sources of capital.

 In each source explain the main procedure to be followed in order to get money/capital.

 Explain advantages and disadvantage of each source.

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 Business financing: is the process through which individuals, institution, governments, an
businesses acquires, spend, and manage money or capital and other financial asset. Whereby,
Capital refers to the financial resources or assets owned by a business that are used in
generating income .There are two main sources of finance/capital, which are internal sources and
external sources
Internal sources; Internal sources of finance are the sources of finance or capital for
businesses which are generated by the business itself in its normal course of operations. The term
“internal finance” (or internal sources of finance) itself suggests the very nature of
finance/capital. This is the finance or capital which is generated internally by the business unlike
finances such as loan which is externally arranged by banks or financial institutions. The internal
source of finance is retained profits, the sale of assets, and reduction / controlling of working
capital. The following are the internal sources of finance
Asset Sales, If you have machinery, computers, inventory or other assets you can sell quickly,
you can raise cash to put out fires or expand your business. You might have to sell assets below
market value to get cash in quickly. In some instances, you might eventually need an asset you’re
considering selling when you get back on your feet. Sometimes, it’s worth it to sell an asset even
if you have to replace it at a higher cost later. An asset sale is usually preferred in the following
cases:-

 Smaller and simpler businesses are more likely to be sold by way of an asset sale for
various reasons (e.g. fewer assets to transfer, accounts are often unaudited and less
reliable).
 An asset sale is preferred if the buyer does not want all the assets, only part, or does not
want to take all of the employees, or wishes to merge the business it is acquiring with its
own business
Advantages of asset sales finance;

 Access to a high standard of equipment that you might not be able to afford otherwise
 Interest rates on monthly instalments are usually fixed
 typically less risky compared to bank loans – if you can’t make payments you’ll lose the
asset but not, for example, your home
 the leasing company carries the risk if the equipment fails or breaks down
 as long as you pay regularly, the agreement can’t be cancelled
 it’s widely available

Disadvantages of asset finance

 The vendor will be left with the company liabilities to pay.
 Liquidation is an option for both the remaining solvent and insolvent company.

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Retained Earnings/profit;
Retained profit is the amount of a business’s net income that is kept within its accounts,
rather than paid out to shareholder. Retained profit is a strong indicator of the long-term financial
stability of a business.
Advantages of retained profit source

 Use of retained earnings as a source of funds does not lead to a payment of cash.

 The dividend policy of the company is in practice determined by the directors. From
their standpoint, retained earnings are an attractive source of finance because
investment projects can be undertaken without involving either the shareholders or
any outsiders.

 The use of retained earnings as opposed to new shares or debentures avoids issue
costs.

 The use of retained earnings avoids the possibility of a change in control resulting
from an issue of new shares.
Disadvantages of Retained Earnings
Despite several advantages of the accrual earnings, it is not free from certain bottlenecks which
are as follows

 amount raised through the accrual earnings could be limited and also it tends to be highly
variable because certain firms follow a stable dividend policy.

 The opportunity cost of these earnings is relatively high because it shows that amount of
earnings, which have been foregone by the equity shareholders.

 Some companies do not give much importance to the opportunity cost of these earnings
and invest these into sub-marginal projects that have negative NPV.

 The retained earnings are also known by different names, such as accumulated income,
accumulated profit, accumulated earnings, earned surplus, undistributed earnings,

Hire purchase, Hire purchase is a form of instalment credit. Hire purchase is similar to
leasing, with the exception that ownership of the goods passes to the hire purchase customer on
payment of the final credit instalment, whereas a lessee never becomes the owner of the goods.
Procedures for hire purchase as an internal source of finance:. Hire purchase
agreements usually involve a finance house.

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  The supplier sells the goods to the finance house.
ii) The supplier delivers the goods to the customer who will eventually purchase them.
iii) The hire purchase arrangement exists between the finance house and the customer

 The finance house will always insist that the hirer should pay a deposit towards the
purchase price. The size of the deposit will depend on the finance company's policy and
its assessment of the hirer. This is in contrast to a finance lease, where the lessee might
not be required to make any large initial payment.
 An industrial or commercial business can use hire purchase as a source of finance. With
industrial hire purchase, a business customer obtains hire purchase finance from a finance
house in order to purchase the fixed asset. Goods bought by businesses on hire purchase
include company vehicles, plant and machinery, office equipment and farming
machinery.

Advantages of hire purchase

 Hire purchase financial service provides finance to hire purchaser to hire the
product at ease, which cannot be afforded by them.

 The hirer can enjoy the asset without making full payment for the asset.
 The hirer pays only the payment in installments. Hence, the outflow of cash will
be less when compared to the benefits derived from the asset.
 Depreciation can be claimed by the hirer on the asset hired.
 The regular nature of the hire purchase payments are of fixed amount. Hence it
helps the business to forecast cash flow.
 Hire Purchase transactions fetches tax benefits. The tax benefits are available
under Income Tax Act and Central Sales Tax Act.

Also there some disadvantages of hire purchase as follows

 Items can be repossessed if payments are not made.

 Monthly payments are often reflective of credit ratings.

 It forces the transaction to cost more than it would otherwise.

 There are fewer discounts usually available.

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 A government grants; Is a financial award given by a federal, state, or
local government authority for a beneficial project. It is effectively a transfer payment. A
grant does not include technical assistance or other financial assistance, such as a loan
or loan guarantee, an interest rate subsidy, direct appropriation, or revenue sharing.
The grantee is not expected to repay the money but is expected to use the funds from
the grant for their stated purpose, which typically serves some larger good.

Advantages of governments’ grants

 One of the primary benefits of government grants is that you don't have to pay anything
back. It's free money for your business. This can take some pressure off your shoulders
so you can focus on other aspects, such as improving your products. Many times,
government agencies are willing to take a risk that an investor or a bank wouldn't,
especially when your business is just getting off the ground.

 Additionally, funding is available in a wide range of categories, from health and wellness
to science, commerce and education. You can use this money to expand your business
and generate more revenue. Furthermore, there is no limit to the number of grants for
which you can apply.

Disadvantages of government grants

 The most challenging aspect of a grant application is crafting the proposal. No matter how
innovative your project is, it's worth nothing without a convincing proposal and a solid plan.
Government agencies usually have very strict criteria. Therefore, the completion of a successful
proposal takes a lot of research and know-how.

 Another drawback is that government grants often come with strings attached. Even if you
qualify for one, you cannot use the money however you want. It's imperative that you stick to the
initial plan and comply with the rules. Plus, you need to track your progress and submit regular
reports to the agency that gave you the grant. If you break the rules, you may be asked to repay
the money.

Venture capital; Venture capital is a money put into an enterprise which may all be lost
if the enterprise fails. A businessman starting up a new business will invest venture capital of his
own, but he will probably need extra funding from a source other than his own pocket. However,
the term 'venture capital' is more specifically associated with putting money, usually in return for
an equity stake, into a new business, a management buyout or a major expansion scheme.
Examples of venture capital organizations are: Merchant Bank of Central Africa Ltd and Anglo

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American Corporation Services Ltd. When a company's directors look for help from a venture
capital institution, they must recognize that:

 the institution will want an equity stake in the company

 it will need convincing that the company can be successful
 it may want to have a representative appointed to the company's board, to look after its
interests.

Procedural the directors of the company must then contact venture capital organizations, to try
and find one or more which would be willing to offer finance. A venture capital organization will
only give funds to a company that it believes can succeed, and before it will make any definite
offer, it will want from the company management:

 A business plan
 Details of how much finance is needed and how it will be used
 the most recent trading figures of the company, a balance sheet, a cash flow forecast and
a profit forecast
 Details of the management team, with evidence of a wide range of management skills

 Details of major shareholders

Advantages of venture capital

 Business expertise. Aside from the financial backing, obtaining venture capital financing
can provide a start-up or young business with a valuable source of guidance and
consultation. This can help with a variety of business decisions, including financial
management and human resource management. Making better decisions in these key
areas can be vitally important as your business grows.
 Additional resources. In a number of critical areas, including legal, tax and personnel
matters, a venture capital firm can provide active support, all the more important at a key
stage in the growth of a young company. Faster growth and greater success are two
potential key benefits.
 Connections. Venture capitalists are typically well connected in the business community.
Tapping into these connections could have tremendous benefits.

Disadvantages of venture capital

 Loss of control. The drawbacks associated with equity financing in general can be
compounded with venture capital financing. You could think of it as equity financing on
steroids. With a large injection of cash and professional – and possibly aggressive –
investors, it is likely that your venture capital partners will want to be involved. The size

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 of their stake could determine how much say they have in shaping your company’s
direction.
 Minority ownership status. Depending on the size of the Venture capital firm’s stake in
your company, which could be more than 50%, you could lose management control.
Essentially, you could be giving up ownership of your own business

Stock exchange; refers to the market place, where financial securities issued by
companies are bought and sold,they are part of the broader capital market ecosystem stock
exchange play a key role in creating liquidity for financial securities.

The following are procedures to follow in stock exchange

 Selection of a broker

A broker is a member of a stock exchange. A broker is an agent of both the

buyer and the seller of securities. If one wants to purchase or sell securities, the
first contacts is a broker.

 Placing an Order:

After selecting the broker the client places an order for purchase or sale of securities. The
broker also guides the client about the type of securities to be purchased and the proper time for
it. If a client is to sell the securities then the broker tells him about the favourable time for sale.
The broker is told to purchase shares, their number and price to be paid.

 Executing the or The broker or his authorized clear declared the purchase or sale
price of securities at that moment when the ordered price of the broker provides
the facilities for making a contract for the transaction
 Preparing the contract note
The broker prepares a contract not stating the number and price of securities
bought or sold the names of the buyers and sellers, brokerage payable by the client,
etc. Thereafter, the contract paper is prepared and signed

 Final settlement

The buyer deposits the estimated cost and the seller delivers the securities in the same
way in case of ready delivery contracts. But in the case of the forward contract, the
settlement is made within a fortnight. Executing the order

 Settlement

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This means the actual transfer of securities. This is the last stage in the trading of
securities done by the broker on behalf of their clients. There can be two types of
settlement

Advantages of stock exchange

 Unlimited Opportunity for investment
Everyone wants to save or invest in one form or another. The stock exchange provides
unlimited investments opportunities to the investors

 Economic Stability
The economic stability of a country is essential for the growth of a healthy industrial
atmosphere and participation of people in productive economic investments. Capital is
the lifeblood of industry

 Rissing new capital

Companies, however, do not get their shares listed on the stock exchange
automatically and, though the actual listing fees payable to the stock exchange are
not big, the cost to the company of meeting the exchanges may be considerable.

 Easy to participate
The Stock Exchange has no statutory authority, or monopoly, over anybody and no
legal powers other than those which individual companies freely contract to give.

Disadvantages of stock exchange

 Impulsive investment
The impulsive investments like investments purely based on one’s impulses or hear-say and not
on research are likely to result in losses to the investors. With experience and past losses, the
investors learn the stock has to be analyzed first and invested later.

 Lack of knowledge
One of the clear demerits of the stock exchange is the lack of knowledge the investors have w.r.t.
The investments they make and the companies they invest in. Most of the issuers rely on the
advice of their brokers or the general market trend which may not be in their best interests. 

 Time-consuming

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The act of trading securities itself has become simple and quick, but the process of registration
like opening a Demit account is a little more time-consuming. However, since it is a one time
process it can be ignored but the research and analysis that is required before making an
informed investment is still industrious.

 Subject to higher risk

Apart from the volatility of the market as explained above, the equity investment carries the
highest amount of risk even in terms of corporate finance

Business angels; A business angel is an independent individual who provides

capital for the development of a business which can enable a business to survive and
grow for example companies such as Goggle, Apple, Starbucks, Computer and etc. relied on
angle financing in their early years to finance growth, the business angels is the largest source of
external financing for companies in the seed and start up phases

The following are advantages of business angles;

 Business angels are free to make investment decisions quickly

 no need for collateral - ie personal assets
 access to your investor's sector knowledge and contacts
 better discipline due to outside scrutiny
 access to Business angles mentoring or management skills
 no repayments or interest

There are also disadvantages of business angels

 While angel investors make it possible for business owners to get their startups
running, there are some disadvantages to obtaining funding in this manner, such
as the loss of equity.

 Angel investors may also expect a substantial return on their investment,

sometimes equal to 10 times their original investment within the first five to seven
years. This can create additional pressure for you and any employees. Before
accepting funding, evaluate whether the business can grow at the rate that an
investor would expect, and establish expectations for growth.

 The other disadvantage is the loss of control. After investing their money in a
startup, most angel investors take a hands-on approach to the businesses.

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 Personal savings; Refers to a money that an individual has put away for
non-immediate use. For example, one may utilize personal savings to
save funds for an expensive purchase, such as a house or a car. In general, it is
recommended for one to maintain personal savings to cover three to six months
of living expenses.

The procedures in personal saving are as follows

 Create a budget

 Understand your expenses

 Understand your income

 
 Consolidate your debt

 Slash or remove unnecessary expenses

 Create an emergency fund7. Save 10 to 15 percent for retirement

 Review and understand your credit report

 Use a tool or personal finance app

 
 Follow money management resources
 

Also personal savings led to the following advantages

 Become financially independent

If you don’t want to or can’t rely on other people, aka the bank of mum and
dad, forever then saving money is the key to becoming financially
independent.

 Less worries about surprise expenses

One of the biggest benefits about saving money is reducing stress and
ability to cover unforeseen expenses. Simply living paycheck to paycheck

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 without any savings leaves you exposed to emergency costs that can’t be
planned for.

 Prepare for future life changes

One point that keeps recurring in this article is the uncertainty of life.
These are not always necessarily bad things and saving can help you
prepare for a number of changes in circumstances.

 Financial security to pursue your dreams

One awesome benefit to saving money is the freedom to chase you dreams!

Despite of having advantages there are some disadvantages also,

 Using your own money to finance your business may put a strain on your family
and personal life. You may not have enough money left over to cover your living
costs. You should try to leave a contingency fund, in case you need extra
money to see you through a difficult period.
 If your business were to fail, you could lose your home and other personal
possessions.
 Many investors and venture capitalists can also provide mentoring and
networking opportunities for you and your business - if you fund your business
alone, you will have to develop your own contacts and mentoring opportunities.

Factoring; is a financial transaction and a type of debtor finance in which a

business  sells  its  accounts receivable (i.e., invoices)

The following are procedures of factoring

 First a careful evaluation of customers is done and then a credit limit is set
on the customers after which the factoring firm enters into the agreement
with the selling company.

 Selling company through its sales invoice gives an indication to its

customers that the amount is being factored with the factor and now the
customers are supposed to make the payment directly to the factor on
the due date.

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 After keeping a stipulated margin factor makes the prepayment to the
selling company.

On the due date when the customers make the payment, the factoring
firms deduct its fees or other charges from it as agreed upon and the amount
already advanced to the selling company and gives the balance amount to
the selling company

Also there are some advantages of factoring as follows;

 There are many factoring companies, so prices are usually competitive.

 It can be a cost-effective way of outsourcing your sales ledger while freeing
up your time to manage the business.
 It assists smoother cash flow and financial planning.
 Some customers may respect factors and pay more quickly.
 Factors may give you useful information about the credit standing of your
customers and they can help you to negotiate better terms with your
suppliers.
 Factors can prove an excellent strategic - as well as financial - resource
when planning business growth.

Disadvantages of factoring

 The cost will mean a reduction in your profit margin on each order or service
fulfilment.
 It may reduce the scope for other borrowing - book debts will not be available
as security.
 Factors will restrict funding against poor quality debtors or poor debtor spread,
so you will need to manage these funding fluctuations.
 To end an arrangement with a factor you will have to pay off any money they
have advanced you on invoices if the customer has not paid them yet. This may
require some business planning.
 Some customers may prefer to deal directly with you.

External source of finance (Debt Financing): This involves borrowing funds from cred the
condition of repaying the borrowed funds plus interest at a specified future time. For the
creditors (Those lending the funds to the business), The reward for providing the debt financing
is the interest on the amount lent to the borrower.. This describes money a company may raise

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from outside its business.it can refer to equity issues, where the firms in question raise funds
thanks to outside investment. The following are external source of finance
Debentures ;If a company needs funds for extension and development purpose without
increasing its share capital, it can borrow from the general public by issuing certificates for a
fixed period of time and at a fixed rate of interest. Such a loan certificate is called a debenture.
Debentures are offered to the public for subscription in the same way as for issue of equity
shares. Debenture is issued under the common seal of the company acknowledging the receipt of
money.

The important features of debentures are as follows:

 Debenture holders are the creditors of the company carrying a fixed rate of interest
 Debenture is redeemed after a fixed period of time.
 Debentures may be either secured or unsecured.
 Interest payable on a debenture is a charge against profit and hence it is a tax deductible
expenditure.
 Debenture holders do not enjoy any voting right.
 Interest on debenture is payable even if there is a loss.

Following are some of the advantages of debentures:

 Issue of debenture does not result in dilution of interest of equity shareholders as they do
not have right either to vote or take part in the management of the company.
 Interest on debenture is a tax deductible expenditure and thus it saves income tax.
 Cost of debenture is relatively lower than preference shares and equity shares.
 Issue of debentures is advantageous during times of inflation.
 Interest on debenture is payable even if there is a loss, so debenture holders bear no risk.

Following are the disadvantages of debentures

(a) Payment of interest on debenture is obligatory and hence it becomes burden if the company
incurs loss.

(b) Debentures are issued to trade on equity but too much dependence on debentures increases
the financial risk of the company.

(c) Redemption of debenture involves a larger amount of cash outflow.

(d) During depression, the profit of the company goes on declining and it becomes difficult for
the company to pay interest.

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 A bank overdraft is a facility extended by a bank to corporates and other clients to withdraw
funds from their account in excess of the balance. This facility is provided by the bank for a fee
and/or interest is charged on the excess amount that is withdrawn for the length of the time. It is
important to know the advantages and disadvantages of the bank overdraft facility in order to use
it effectively.
An overdraft facility allows the facility holder to withdraw money from the account despite
having no balance. There is a limit on the amount that can be overdrawn from the account.
The overdraft limit is usually set by the bank basis the amount of working capital,
creditworthiness of borrower and security offered by borrower
Advantages of bank overdraft
 Handle time mismatch flow of fund, a bank overdraft is usually the best for businesses
with greater movement of cash flow in a given time frame.  An overdraft can help reset a
skipped cycle of rotation of inflow and outflow of cash. In other words, if sales proceeds
and purchases result in a flow of money in and out many times during a week/month; an
overdraft facility allows managing cash flow gaps that might arise due to timing
mismatch.
 Helps in keeping good track record, if a check was made on the basis of some amount to
be received, and if it is delayed, the check does not bounce due to inadequacy of funds. 
Hence, overdraft facility allows for a better payment history.
 Timely payments, It also ensures timely payments and avoidance of late payments
penalties as payments can be made even if there is a lack of sufficient balance in the
account.

 Less paperwork, it requires less paperwork that would usually be required in long-term
loans as overdraft facility is easy to avail.
 Flexibility, Overdraft facility has the advantage of flexibility as one may take it at any
time, for any amount (up to the limit allotted), and for even as less as one or two days.
 Benefit of less interest cost, the interest is calculated only on the amount of funds used.
This allows for greater savings in the interest cost compared to a normal loan taken for a
fixed time period. While in other loans, interest is required to be paid even if the money
remains unused. In this case, the charging of interest starts with the amount over drawn
and it stops instantly when it is paid off

Disadvantages of bank overdraft

 Higher interest rates, Overdraft facility comes at a cost. At times, the cost is usually
higher than the other sources of borrowing.

 Risk of reduction in limit, Overdraft facility is a temporary loan and undergoes regular
revisit by the bank. Hence, it runs a risk of a decrease in the limit or withdrawal of the

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 limit. Reduction in the withdrawal of limit may happen usually when company financials
may represent poor performance; hence, the facility may be withdrawn especially when
the company may require it the most.

 Risk of seizing, Bank overdraft facility may at times be secured against inventory or
other collaterals like shares, life insurance policies etc. The company may run a risk of
those assets being seized if it fails to meet payments.

 Debtor’s collection becomes lethargic, At times, availability of overdraft facility may

make the company less strict on the collection of debtors’ payment. In other words, a
company may not be too much on their feet to collect payments from debtors, as
immediate payment outflows can be managed by overdraft facility.

 A letter of credit is highly customizable and effective form which enables new trade
relationships by reducing the credit risk, but it can add on to the cost of doing some
uncertain business in the form of bank fees or formalities. It is basically a letter issued by
one Bank to another as a guarantee of payment for a particular person on particular terms
and conditions

Advantages of Letters of Credit :-

Letter of Credit enjoys various numbers of advantages over other methods to do

international trade transactions. Some of the major essential ones are listed as following:-
 It gives the trading partners a chance to transact and interact with unknown people or
establish new trade relationships.
 It helps in expanding and broadening their business quickly into new geographical areas.
 A letter of credit is highly effective and stable.
 Both the trading partners can put in terms and conditions as per their requirements and
demands and then arrive at a mutually decided exclusive list of clauses.
 It makes the issuing bank independent of the trading partners’ obligations and any
conflicts arising out of those liabilities.
 It transfers the credit-worthiness from the exporter or buyer to the issuing bank.
The importer can do any number of transactions at the same time when he is backed by
an established and larger institution.
 A letter of credit is safer for the exporter in case the importer goes bankrupt. Since the
creditworthiness of the seller is transferred to the issuing bank, it is the bank’s obligation
to pay the amount as agreed in the letter of credit. Therefore, a letter of credit implies the
exporter from the importer’s business.

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 Disadvantages of Letters of Credit:-

As with any financial instrument, even this has disadvantages along with the advantage
which is as following:-
 It adds more cost on doing business as banks charge fee for providing services.
 A letter of credit follows complex governing rules and has chances that it can be misused
to take advantage of the applicant.
 A letter of credit fears of a material fraud risk to the importer. The bank will pay the
exporter upon looking at the shipping documents thoroughly and not the actual quality of
goods displayed. Disputes and arguments can rise if the quality is different from what
was agreed upon.
 A letter of credit also carries risk alongside.
 A letter of credit has an expiration date and must be used before it which is the greatest
disadvantage as it becomes time restraint.

.
Bond; Stock prices generally go up faster than bond prices, but they're also usually riskier.
Bonds, which are loans to governments and businesses that issue them, are often called good
investments for older investors who need to rely on steady interest income. Some bonds are
riskier than others, and usually pay higher interest as a result, so it's good to make sure you
understand the particular securities you invest in.
  Advantages of Bonds
Bonds offer safety of principal and periodic interest income, which is the product of the stated
interest rate or coupon rate and the principal or face value of the bond. Bonds are ideal
investments for retirees who depend on the interest income for their living expenses and who
cannot afford to lose any of their savings. Bond prices sometimes benefit from safe-haven
buying, which occurs when investors move funds from volatile stock markets to the relative
safety of bonds.
Governments and businesses issue bonds to raise funds from investors. Bonds pay regular
interest, and bond investors get the principal back on maturity. Credit-rating agencies rate bonds
based on creditworthiness. Low-rated bonds must pay higher interest rates to compensate
investors for taking on the higher risk. Corporate bonds are usually riskier than government
bonds. U.S. Treasury bonds are considered risk-free investments.
You can buy bonds directly through your broker or indirectly through bond mutual funds. You
can also buy U.S. Treasury bonds directly from the department's Treasury Direct website.
Disadvantages of Bonds

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The disadvantages of bonds include rising interest rates, market volatility and credit risk. Bond
prices rise when rates fall and fall when rates rise. Your bond portfolio could suffer market price
losses in a rising rate environment. Bond market volatility could affect the prices of individual
bonds, regardless of the issuers' underlying fundamentals.
Credit risk means that issuers could default on their interest and principal repayment obligations
if they run into cash-flow problems. Some bonds have call provisions, which give issuers the
right to buy them back before maturity. Issuers are more likely to exercise their early-redemption
rights when interest rates are falling, so you then might have to reinvest the principal at lower
rates.

Term loan;The term is a loan offered by a bank or a institution. In the case of the term
loan, the company doesn’t need to issue debentures. But bank/financial institution goes through a
thorough analysis of the company and then they offer a loan. Term loans are also secured by the
assets of the company. If the company fails to pay off the money within a stipulated time, the
assets are acquired by the bank or financial institution.

Short-Term Loan; Companies may take a short-term loan for their immediate needs
from the bank. Since the amount is small and the amount would be paid off within a short stint,
the loan is unsecured in nature.

Advantages of Short-Term Loans

 Fast Approval, A short-term loan is suitable for people who need quick access to cash.
Just like a payday loan, a short-term loan application can be approved within a few hours
depending on the lender. In some cases, you will have access to the funds within the same
day or the following business day.

 You Pay Less Interest,

Typically, the longer you owe the lender, the higher the interest you will pay. However, with a
short-term loan, you will be paying back everything within a shorter period which means you
pay less interest as well. You will still save some money even if the interest rate is higher
compared to that of long-term loans.

 It Can Help You Improve Your Credit Rating

Unlike the long-term loans, you have a luxury of choosing a short-term loan that will suit
personal circumstances. For example, if you have a bad credit history, then you can take a short-
term loan for a few months to help you improve your credit score. As long as you repay the loan
on time, you will see your credit rating improve.

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  Offers Flexibility and Reduces Stress

These types of loans provide convenience and flexibility. You can apply for a short-term loan
any time of the day since most lenders have websites. You will also avoid the stress of owing the
lender money for a longer period and watching the interest accrue which can turn into emotional
and psychological torture. 

Disadvantages of Short-Term Loans

 They are High-Cost Loans,

Typically, short-term loans attract high-interest rates and high monthly payment. Since you are
financing the principal debt over a shorter period, you may end up paying a significant amount of
money every month compared to what you will pay if you are servicing a long-term loan.

 It Can Have a Negative Impact on Your Credit Score

although you can use a short-term loan to build your credit score, the consequences can be dire
if you fail to repay it on time. Your new debt to income ratio plus the high-cost new loan will
drastically bring down your credit rating.

 Can Make You Fall into a Cycle of Borrowing

The flexibility, convenience, and easy availability of short-term loans can make you a seasonal
borrower. You may find yourself hooked towards borrowing whenever you need some money
which is a risky not good. This means that you may end up spending more than you can afford or
waste a lot of money.

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 REFERENCES

 Diez-Viel, I.Martin de Castro, G., Montoro Sanchez, M.A. (2012).

Introduction to Business Administration. Ed: Thomson
 Kinicki, A.,and Williams, B. (2010). Management: A Practical Introduction.
Fifth Edition. McGraw-Hill.
 Madura, J. (2007). Introduction to Business. Ed: Thomson

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