Business essentially need finance for the short-term and the long-term. There are a number of ways of raising finance for a business. The type of finance chosen depends on the nature of the business. Large organisations are able to use a wider variety of finance sources than are smaller ones. Savings are an obvious way of putting money into a business. A small business can also borrow from families and friends. In contrast, companies raise finance by issuing shares. Large companies often have thousands of different shareholders.
The sources of finance;
The money needed to start a business is called business finance. This resource will look at some of the possibilities. This factor can be defined as long term and short term factors. We need to remember that some sources of finance will be appropriate for some businesses but not for others.
There are a number of factors to think about when looking at this area of business. We will be looking at the following:
• Short term sources of finance:
o Bank overdraft
o Trade Credit
o Invoice discounting
o Bank loans
o Credit cards
• Long term sources of finance:
o Bank loans
o Share issue
o Preference share.
o Convertible debentures
o Leasing and higher purchase
o Asset sales
o Venture capital
o Retained profit
o Owners' capital
o Government, local authority or EU grants
There are also two more different types of finance, they are Internal and External Finance
Internal finance comes from the trading of the business.
External finance comes from individuals or organisations that do not trade directly with the business e.g. banks. Description of short term finance
Short term sources is needed to cover the day to day running of the business. It will be paid back in a short period of time, so less risky for lenders.
Description of long term finance:
Long-term finance tends to be spent on large projects that will pay back over a longer period of time. More risky so lenders tend to ask for some form of insurance or security if the company is unable to repay the loan. A mortgage is an example of secured long-term finance. Distinguish between short term and long term sources of finance: Short term source refers to money that is needed to finance activities that are usually going to last less than one year. Such finance is generally used to manage the day to day operations of a business. Long term source refers to finance that is needed over a long period of time - certainly over a year and possibly over many years. It tends to be used for financing the setting up of businesses and for expansion of existing businesses. However, this fact is very much strong from the definition that the basic difference between these two sources is ‘ period of time’. The sources that is used to obtain money to finance business for a small period is short term sources and sources that are used to arrange money for a long time, those are long term sources. On basis of this time period procedures, equipments, assets and usefulness are different to this two different sources. The main long term sources are;
o Bank loans: A bank loan is a long term source of finance and will often be for much larger sums of money. A loan is useful for a business that is starting up or looking to grow. Loans are often used to buy fixed assets (see balance sheets) such as machinery and vehicles. A business will pay the bank back each month in instalments and will also pay an interest charge. # Advantages;
1. It is a flexible source of finance as loans can be repaid when the need is met.
2. Finance is available for a definite period, hence it is not a permanent burden.
3. Banks keep the financial operations of their clients secret. 4. Less time and cost is involved as compared to issue of...