Introduction
Finance of a business means that the business raises funds to run its activities. It is an essential part of running a business because without business finance, the business will not be able to develop, grow and even start. In addition, business finance keeps cash flowing. Businesses usually raise funds from the shareholders, long-term and short-term sources. There are risks on every decisions that investors make to finance a business as no one knows how will it goes in the future. Factors like natural disaster, economic crises and changes in demand of markets might destroy the business. Therefore, sometimes it is difficult for businesses to raise funds if investors do not want to take the risk.
Short-term financing and long-term financing
Short-term financing and long-term financing are divided into internal and external sources of finance. Internal sources of finance are sources that come from its own business. External sources of financing are sources that come from the outside of the business. Internal and external sources of financing a business can also be divided into short-term and long-term financing.
Short-term financing means raising funds that need to be paid back within a year in order to operate daily business, including buying inventories, daily supplies and paying employees’ salaries.
Long-term financing involves purchasing new equipment, expanding the business, improving research and development, and also reinforce cash flow system. Businesses are allowed to pay back in a much longer period of time, for instance, 10 years.
It clearly shows that the most obvious differences between short-term and long-term financing are the duration of the finance and their purposes. However, these are not the onl...
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Pizzey, 2001, Accounting and Finance, fifth edition, Continuum London and New York
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...ws the business to lease equipment used for farming and production. This use of financing allows Tassal to avoid a large loss of capital when purchasing equipment. Instead they are able to make periodic payments, which offer a distribution of funds rather than an initial large expenditure. Therefore Tassal is able to focus on its key activity of ensuring growth and a continued long term return for investors. By avoiding large expenditure of capital these funds can be kept, allowing for increased profits which directly affect the shareholders in the company.
...nt interest. The company wanted to invest extra mortgage-backed securities with $100 million and get 7 percent interest. Then the company borrows a short term loan for $100 million at 4 percent interest. The leverage of company is $10 in a debt for every $1 of equity. The return on equity would be 3.7million on equity of $10million. Hence, investor was willing to obtain short term loan in the bank while they would be given a higher premium. Diamond and Rajan (2009) suggest that the short term debt is seemed like cheaper compared to the future illiquidity’s cost and the long term capital. Therefore, heavy short term leverage market becomes more common in the market of bank capital structure. While the risk-averse banker is unlikely bear the excessive risk, the illiquidity’s costs would be more salient. This had enforced the market into a heavy capital structure.
Block, S. B., & Hirt, G. A. (2005). Foundations of Financial Management (11th ed). The
Berk, J., & DeMarzo, P. (2011). Corporate finance: The core, second edition. (2nd ed.). Boston, MA: Prentice Hall.
approach was to be utilized as a framework for financing (Kronenfeld, 2011). In 1972, benefits
"Financial Management in the International Business." Hill: International Business: Competing in the Global Marketplace, Sixth Edition. : The McGraw−Hill Companies, 2007. . Print.
For one thing, Demarzo & Fishman (2007) maintain the long-term obligation/repayment and credit assume diverse obligation in executing the ideal contract. In fact, “The long-term debt is effective for financing early consumption … relative to outside investors (2007).” First thing to remember is how fixed and variable costs factor into the analysis.
S, Lumby, and Jones C. Corporate Finance Theory and Practce. Andover: Thomson Publishing Services, 2011.
Melicher, Ronald W. and Edgar A. Norton (2014). Introduction to Finance (15th ed.). Hoboken, N.J.: John Wiley & Sons, Inc.
There is a range of criteria relevant for a decision of financing a new venture. To construct my list for the evaluation of a new company as an opportunity I have selected to refer to t...
Adelman, P. J., & Marks, A. M. (2010). Entrepreneurial finance. (5 ed.). Bedford, Texas: Prentice Hall.
The cash flow from your business's operations ¡X the cycle of cash flow, from the purchase of inventory through the collection of accounts receivable ¡X is the most important factor for obtaining short-term debt financing. A lender's primary concern is whether your daily operations will generate enough cash to repay the loan. In addition, cash flow shows how your major cash expenditures relate to your major cash sources. This information may give a lender insight into your business's market demand, management competence, business cycles, and any significant changes in the business over time.
In our business world, ‘Capital is the lifeblood of every business venture’ (Smith, 2012). Capital can build up company, purchases non – current assets for instance machinery or plant and paid off daily expenses for examples wages, lighting, power etc. Every company needs to have someone to manage the finance by thinking different types finance which are internal short term, internal long term, external short term and external long term financial resources. These are the main four ways which can raise the capital but those sources may relate to different repayment rate and length and the amount will be received. When the owner and manager thinking to apply internal or external financial resources they need to consider Purpose, Amount, Repayment, Interest and Security which is name as PARIS. Purpose is identifying what type of finance are suitable to required, amount is how much should be borrow, repayment is how much and when should the business pay the finance back. Interest is how much is the finance cost and security is the business need put down the business assets or personal household as a deposit before receive any finance. These are the main concepts owner and manager need to remember before apply any type of finance. (Cox and Fardon, 2009) Director and manager need to think effectively for rising capital in an effective way which includes lower repayment and the control of the company. (Gillespie, 2001)
Block, S. B., & Hirt, G. A. (2005). Foundations of financial management. (11th ed.). New York: McGraw-Hill.
...ower to wait a year or before to start to make the repayment. Somehow, some loans can be repaid at the end of the period instead of instalments. Besides, security, for example some assets and the properties of the business, is needed for the bank loan. There are three advantages in the bank loan. First, the timing and the amount of the repayment is known when getting the bank loan, so it is quite easy to budget. Second, there is also a repayment holiday, so the repayment schedule is quite flexibility. Third, the interest rates can be discussed and it can be lower than the overdraft. However, it is because the business loan is a long-term commitment, which is needed to service and this will be to high interest rate. Besides, security such as the house of the business owner is needed and this will not be good to the owner if the business is failed. (Cox, Fardon, 2009)