Sources of Finance - Debt Factoring

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11 Terms

1
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What is long term finance?

Finances the whole business over many years

2
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What is medium term finance?

Finances major projects or assets with a long life

3
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What short term finance?

Finances day-to-day trading of the business

4
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What are the examples of long term finance?

  • Share capital

  • Retained profits

  • Venture capital

  • Mortgages

  • Long-term bank loans

5
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What are the examples of medium term finance?

  • Bank loans

  • Leasing

  • Hire purchase

  • Government grants

6
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What are the examples of short term finance?

  • Bank Overdraft

  • Trade creditors

  • Factoring

7
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What is factoring?

Factoring is a way a business can raise cash by selling its sales invoices to a third party (a factoring company) at a discount

8
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What is an example of factoring?

A business makes sales of £100,000 per month. Its customers are given 60 days to pay their invoices. On average, the business has around £200,000 owed to it by customers at any one time. The business needs to raise cash to improve its liquidity

9
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What are two options that businesses can use for invoices?

  1. Wait for customers to pay their invoices (e.g 60 days)

  2. Sell these invoices to a factoring company for cash (at a discount)

    • E.g invoices worth £200,000 are sold to the factoring company

      • The business gets 90% in cash= £180,000

      • The factoring company collects and keeps the £200,000

10
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What are the benefits of factoring?

  • Receivables (amounts owed by customers) are turned into cash quickly

  • Businesses can focus on selling rather than collecting debts

11
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What are the drawbacks of factoring?

  • Quite a high cost (discount offered to the factoring company)

  • Customers may feel their relationship with the business has changed