Short-term & Long-term Sources of Finance (CIE IGCSE Business)

Source

Advantages

Disadvantages

Overdrafts

• 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

• 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

• 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

Source

Advantages

Disadvantages

Bank loans

• 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

Hire Purchase

• 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

Leasing

• 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

Share Issue

• 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

Debentures

• 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