Sources of Finance - Debt Factoring

0.0(0)
learnLearn
examPractice Test
spaced repetitionSpaced Repetition
heart puzzleMatch
flashcardsFlashcards
Card Sorting

1/10

flashcard set

Earn XP

Description and Tags

Study Analytics
Name
Mastery
Learn
Test
Matching
Spaced

No study sessions yet.

11 Terms

1
New cards

What is long term finance?

Finances the whole business over many years

2
New cards

What is medium term finance?

Finances major projects or assets with a long life

3
New cards

What short term finance?

Finances day-to-day trading of the business

4
New cards

What are the examples of long term finance?

  • Share capital

  • Retained profits

  • Venture capital

  • Mortgages

  • Long-term bank loans

5
New cards

What are the examples of medium term finance?

  • Bank loans

  • Leasing

  • Hire purchase

  • Government grants

6
New cards

What are the examples of short term finance?

  • Bank Overdraft

  • Trade creditors

  • Factoring

7
New cards

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
New cards

What is an example of factoring?

A business makes sales of ÂŁ100,000 per month. Its customers are given 60 days to pay their invoices. On average, the business has around ÂŁ200,000 owed to it by customers at any one time. The business needs to raise cash to improve its liquidity

9
New cards

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 ÂŁ200,000 are sold to the factoring company

      • The business gets 90% in cash= ÂŁ180,000

      • The factoring company collects and keeps the ÂŁ200,000

10
New cards

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
New cards

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