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External sources of finance - Coggle Diagram
External sources of finance
Short-term finance
Used to fund revenue expenditure and are usually repaid within one year.
Overdrafts
They are a short-term bank loan which is used in a matter of days to cover cash shortage (interest is only paid when the account is overdrawn).
Trade credit
When a business does not pay immediately for goods it purchases.
Debt factoring
It means ‘selling’ a debt (money owed to a firm by its debtors). Implies giving the firm a percentage of the debt, then recover it full for themselves, in which the business gets immediate access to cash but may forego (give up) the full value of the debt.
Long-term finance
Used to fund capital expenditure, which is repaid over a period longer than one year.
Leasing
Instead of purchasing, the business pays a set fee to lease an asset for a period of time (leasing companies maintain and replace the asset if damaged).
Hire-purchase
It is similar to leasing, but instead, this gives the asset once the monthly payments have been made.
Bank loans
This is a safe source of finance, the bank charges interest on the loan amount. But it is difficult with no credit history, as the business must demonstrate their ability to repay.
Sale and leaseback
This is used to resolve short-term cash flow crisis but also a way of funding long-term growth. The business sells an asset and eases it back from its new owner, allowing an immediate inflow of cash at the expense of long-term lease payments.
Venture capital
Specialist finance providers, which invest in smaller, risky ventures and don’t ask for security. They loan money in return for a share of business ownership/share of profit.
Debentures
Form of a long-term loan to a limited company that uses fixed interest rates which are repayable over a specific time period.
Grant
Founds offered by the government, they are available only for certain business and the money is low.