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External Sources of Finance - Short-Term (0-12 months) (Factoring (Allows…
External Sources of Finance - Short-Term (0-12 months)
Overdraft
An agreement with a bank where the business can overdraw on their account to a set limit
Cons
Cannot borrow large sums of cash
Pros
Quick and easily accessible
Flexible
Variable interest rates
Factoring
Issued by factoring company
Factoring Company ==> Business
Allows businesses to instantly receive their awaiting account receivables
The Factoring company gives them the cash instantly but takes some as a profit (then cases up the other business for the cash)
Cons
Business loses a percentage of their accounts receivables
Pros
Cash received within 48 hours
Good for short-term liquidity problems
Commercial Bill
Issued by financial institutions
Large sums of money ($100,000+)
Financial Institution ==> Business
Pros
Flexible interest rates
Flexible method/timing of repayments
Given the full amount
Cons
Secured loan
Assets can be seized