sources of finance- unit 4

short term finances

must be repaid within one year

bank overdraft

permission given by the bank to a current account holder to withdraw more money to pay for small value items (ST)

accruals

may be used to pay for utilities. The utilities are used during a month but do not have to be paid until the end of the month. This money can be used for other purposes during the month.

trade credit

involves purchasing the goods on credit (buy now pay later) they will get a bill called an invoice saying when it needs to be payed

credit card

acquiring goods on credit (buy now pay later), credit cards have a credit limit

factoring

debtors to the business can cause liquidity problems when they owe money to creditors, they can sell their debt to a factoring firm and receive 80% back , when the debtor pays them back they will make a 20% profit

saving

the act of not spending

investment

the act of not spending to hopefully make a profit

characteristics of a good investment

• good return

• little risk

• can be cashed in quickly

• little tax on the return

medium term finances

has to be repaid within 1-5 years

medium term loan

a business can borrow from the bank and repay them over the next 5 years. the repayment is flexible

APR anual percentage rate

the total cost of the loan expressed as a percentage of the total amount borrowed

hire purchase

the business pays a deposit to the hire purchase firm, then pays the rest in instalments over a set amount of time while using the asset , the business does not own the asset until the final instalment is made

leasing

involves renting an asset, business will never own the item that is being leased

long term finances

finance that will be repaid over a term longer than 5 years

mortgage

long term loan taken out to purchase a property

equity/ ordinary share capital

major source of finance for certain forms of business, companies raise equity capital by selling shares

retained earnings

this is net profits earned by the firm that is put back into the business for its development

grants

numerous non repayable funds from government bodies or the EU, these do not have to be repaid as long as certain conditions are met