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Define external source of finance.
External sources are sources of money from outside the business, from other people putting money into the business.
What is trade credit?
Allows a business to obtain raw materials and stock but pay for them at a later date. The credit period is usually between 30 and 90 days.
What are the advantages of financing a business using trade credit?
What are the disadvantages of financing a business using trade credit?
What is an overdraft?
An agreement with the bank to allow available balance to go below zero when withdrawing money from a bank account.
What are the advantages of financing a business using overdrafts?
What are the disadvantages of financing a business using overdrafts?
Overdrafts can become expensive due to the high interest rates charged by banks. In addition, the bank can demand full repayment within a short period of time.
What is hire purchase?
A business agrees to a contract to acquire an asset by paying an initial installment and repaying the balance of the price of the asset plus interest over a period of time.
What are the advantages of acquiring capital assets using hire purchase?
Allows a business to spread the cost rather than use large sums of money by paying upfront, which new and smaller businesses may not have.
Flexible, with terms from one to five years.
Unlike leasing, once the final payment is made, the business owns the asset.
What is leasing?
Involves renting capital assets such as equipment and machinery instead of purchasing it.
What are the advantages of acquiring capital assets using leasing?
It is cheaper in the short run than buying a piece of equipment outright.
If technology is changing quickly or equipment wears out quickly, it can be regularly updated or replaced.
Cash-flow management is easier because of regular payments.
What are the disadvantages of acquiring capital assets using leasing?
May be more expensive in the long term because the leasing company charges fees, which make the total cost greater than the original cost of the asset(s).
What is a bank loan?
Money lent to a business that is repaid for a set period of time with interest. The interest rate is usually fixed.
What are the advantages of financing a business using a bank loan?
What are the disadvantages of financing a business using a bank loan?
What is a mortgage?
Money provided by a bank or building society to help a business purchase a property.
What are the advantages of financing a business using a mortgage?
What are the disadvantages of financing a business using a mortgage?