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Sources of finance The following are sources of finance ie where a business may get its money from. Bank loans Long term lending by a bank over a fixed period. Interest has to be paid and usually requires security (Security - i.e. a legal right given to the bank to take an asset if the loan isn’t repaid) A good way of getting funds enables the business to spread the cost over a long period of time but interest has to be paid. Debentures The business offers to pay a fixed rate of interest over a set period of time in exchange for money A good way of getting finance but the interest rate may have to be quite high to encourage lenders. Debt factoring The business sells to another business the unpaid invoices it has. (Invoice – a bill!) A good way of getting new business because the firm can offer trade credit (see later) then sell the invoice to get the money (but not all the value of the invoice will be paid). Hire purchase Renting a piece of equipment for a fixed period, after which the business takes ownership. Leasing Renting a piece of equipment from another business for a fixed period of time. Relatively cheap way of getting equipment without having to spend the large amount purchase would require. Mortgages A bank loan on property. Very cheap, a business pays interest on the loan plus the capital amount. Taken out over a very long period of time, maybe up to 30 years. Overdrafts An overdraft occurs when a business spends more money than it has in its bank account. This is a very expensive way of borrowing money and must only be done for very short periods of time. Shares A ‘limited company’ can issue more shares. This is free of interest but profit will have to be distributed in the form of a ‘dividend’ (an amount of profit per share). There is also danger that the more shares there are the greater the possibility of a shareholder revolt with shareholders taking over the business or selling their shares to someone else. Trade credit Occurs when a business gets hold of supplies but don’t have to apy for them for a set period of time e.g. 30 days credit. A good way of getting supplies using them to make profit before having to pay for them. Retained profit Profit saved form the previous years profits The cheapest (free!) form of finance. |