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Business Finance Chapter 29 (Short Term Finance (Creditors Delaying…
Business Finance
Chapter 29
Needs of a business
Short Term
0 - 1 Year
Examples:
Wages
Light & heat
Insurance
Medium Term
1 - 5 Years
Examples:
Motor Vehicles
Office equipment
Long Term
5 + Years
Examples:
Buildings
Land
Heavy Machinery
Short Term Finance
Creditors
Delaying payment to buy time
Cost:
Potential damage to supplier relationships
Expenses due
Delay payment to buy time
Cost:
Services might be cut off
Credit card
Use card now and pay later
Cost:
Delayed payments leads to high interest costs
Bank Overdraft
A short term loan repaid over time
Cost:
High interest to be paid
Medium Term Finance
Medium Term Loan
Borrow to repay over time
Cost:
Interest to be paid on loan
Leasing
Getting the use of an asset by paying over time
Cost:
More costly than buying and do not own asset.
Hire Purchase
Paying for an asset over time which is owed after the last payment
Cost:
More expensive than loan or leasing but asset is owned
Long Term Finance
Retained Earnings
Reinvesting money earned by the business back into the company
Cost:
No financial cost but not always available
Grants
A sum of money given by the government or the EU not to be repaid
Cost:
No financial cost but it's conditional, not always available
Capital
Adding more owners to the business who invest money
Cost:
Extra dividends to pay shareholders
Long Term Loan
Borrow a large amount to repay over many years
Cost:
Interest to be paid over life of loan
Factors When Deciding Source of Finance
Purpose
- how long is the need?
Amount
- Can you afford to pay it back?
Cost
- Are there cheaper options?
Control
- Will the source results in control loss?
Security
- Do you need to provide collateral