Short-term & Long-term Sources of Finance (Cambridge (CIE) O Level Business Studies)

A limit is agreed and interest is charged only when a business ‘goes overdrawn’

Offers significant flexibility and aids cash flow

An overdraft may be called in if the bank is concerned about a business's ability to repay what it owes

Interest on overdrafts tends to be higher than on other loans

Trade credit is usually interest-free

A business can increase its stock without having to immediately pay for it, which can significantly enable positive cash flow if the stock is sold before payment becomes due

Suppliers may prioritise delivery to customers who have the shortest repayment dates

Cash needs to be carefully managed to ensure the business has the money available to pay its suppliers on the agreed date

Debt factoring provides a source of Immediate cash to the business

The business does not have to handle the debt collection themselves

The third-party debt company will keep a percentage of the debts collected as reward

• The business does not get paid the total value of their debts

Bank loans are usually unsecured and are typically repaid over two to ten years

Interest rates are fixed for the term of the loan so repayments are made in equal instalments, which helps with business planning

Interest is payable and the business assets are at risk if the business does not make repayments as planned

The firms does not need to spend a large sum of money to acquire and use an asset

A deposit is usually payable before the asset is delivered

Interest charges can make the overall cost higher that buying an asset outright

The business does not own the asset during the period of the lease and so is not responsible for maintenance or repair costs

Leasing is usually more expensive in the long run than buying an asset

Large amounts of money can be quickly raised from wealthy investors

Shareholders who buy a large number of shares may also bring and share expertise, which can be beneficial to the business

Shareholders are the owners of shares and they are entitled to a share of the company’s profit when dividends are declared

Shareholders usually have a vote at a company’s Annual General Meeting (AGM) where they can have a say in the composition of the Board of Directors

Can be used to raise very long-term finance,  e.g. over 30 years

Unlike share capital,  debenture holders have no share in the company itself

Interest and the loan itself has to be repaid