Professional Documents
Culture Documents
Unit 3
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Debentures
Long-term Loan
Leasing
Hire purchase
Medium-term loan
Bank overdraft
Bank loan
Creditors
Sources of Finance
abraham
Internal Sources
of Finance
Long-term Financing:
Medium-term Financing:
Short-term Financing:
Provides the working capital needed for
the day-to-day expenses of the
business.
Covers the period from a few days to
12 months.
Bank Overdraft
The bank allows the current account of the
business to become ‘overdrawn’. This means
that it will have a negative balance. A facility to
become overdrawn should be arranged with
the bank before the money is required.
● Advantages:
• The most flexible form of financing as the amount of
money needed can change day-to-day.
• Interest is only payable on the amount overdrawn.
• Can be cheaper than a loan if overdrawn period is
kept short.
Bank Overdraft
● Disadvantages:
• Interest rates are generally higher than for a
loan.
• A fee is often charged for having the facility.
• Not generally available for a long period of time.
• The bank can ask for repayment at any time
which could cause the business to be made
bankrupt.
• There will be an upper limit to the facility. The
firm cannot be overdrawn more than this.
Trade Credit
When a business delays paying its
suppliers for an agreed period of time
(usually 30 or 60 days).
● Advantage:
• Is like the business receiving an interest-free
loan for a month or two.
• Allows the business to sell goods before
paying for them.
Trade Credit
● Disadvantages:
• Suppliers may refuse to send more supplies if
payments are left too long.
• The firm cannot usually obtain a discount for
paying the supplier quickly.
• Is generally limited to a period no longer than
60 days.
Question 3.1.3 – 3.1.5
(answer in groups)
Sources of Finance
Business Angels (BA)
● Are wealthy entrepreneurs who risk their
own money by investing in small to
medium-sized businesses that have high
growth potential.
● They take proactive role in the setting up
or running of the business venture –
owner loses some control to the BA
Criteria for Business Angels
● Return on investment – business has to
have good potential to be highly profitable.
● The business plan – should outline the LT
aim and purpose of the business venture.
● People – must have good team of people.
● Track record – Investors will assess the past
track record of the business and its
management before investing any capital.
Crowdfunding
-the practice of funding a project or
venture by raising money from a large
number of people, in modern times
typically via the Internet.
Microfinance Providers
(Short-term/Medium term)
STAGE PC
Size and status of firm
● A well-known and large MNC will find it
much easier to raise finance from a
wider range of sources than a sole
trader.
● Large organizations are also able to
obtain cheap finance due to financial
economies of scale.
Timeframe
● If finance is needed for a long period of
time, then long-term loans such as
mortgages or debentures are suitable.
● If finance is needed to help fund working
capital, then short-term sources such as
trade credit and overdrafts are more
appropriate.
Amount required
● Large amounts of finance might be
raised through IPO or through secured
long-term loan from banks.
● If only a small amount is needed then
retained profit or an overdraft might be
sufficient.
Gearing
● Lenders assess a firm’s existing gearing
(LT external borrowing of a firm as a % of
its capital employed) before approving
any finance.
● Firms with high gearing are relatively
high risk as they have existing debt
commitments and more vulnerable to
any increase in interest rates.
External factors
● Factors beyond the control of a business
can have a huge impact on the strategic
choice of finance.
● Businesses will be affected by the state
of the economy and consumer
confidence levels.
Purpose of finance
● The choice of finance depends on
whether it is intended for the daily
running of the business (ST purposes) or
for the replacement of fixed assets over
a longer time period.
Cost of finance
● Managers need to consider the purchase
cost of assets and the associated costs,
such as administrative fees and
maintenance charges.
● Higher costs tend to require longer term
sources of finance.
Key Terms