Critically elucidate the sources of finance. Discuss the advantages and disadvantages of them?
Introduction
All businesses need finance to fund business activity. This includes Starting up a business, e.g. pay for premises, new equipment; run the business, e.g. having enough cash to pay staff wages and suppliers on time or expand the business, e.g. having funds to pay for a new branch. Whatever the purpose, choosing the right source of financing for each distinctive situation can be puzzling. The source of finance for each business varies according to the type, i.e. external or internal or by the time factor, i.e. short term, medium term and long term.
Type:
External sources of finance come from outside the business
Internal sources of finance come from within the business
Time:
Short-term: refers to the current tax year
Medium-term: refers to the time period of more than twelve months but less than five years
Long-term: refers to any period after the next five years
Short-Term Medium-Term Long-Term
Internal Sources Personal savings
Selling Assets
Reducing Stock Retained Profits
Deferred Payments Selling Assets
Retained Profit
External Sources Bank Overdraft
Trade Credit
Bank Loans
Credit Cards
Debt Factoring
Government Grants/subsidies Leasing
Hire purchase
Roll Over Credit
Sponsorships
Bank Loans
Mortgages
Bank Loans
Issue of shares
Debentures
INTERNAL SOURCES OF FINANCE
The internal sources of finance, usually short term, include:
o Personal Savings
Personal savings is probably the easiest source of finance, it is the owners own savings that can be used to finance the business. It has the advantage of being quickly available and bears no interest. But it can als...
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...eve its goals. And while this type of loan requires less maintenance, it is harder for new businesses to get this type of financing.
Short term financing offers the highest flexibility for small businesses and quicker access to cash, when most needed. For medium to large-businesses whose focus is on future growth, Long-term loans are more suitable.
Conclusion
Finances are part and parcel of our daily life and routine, and deeply rooted in our economic system. Small financial requirements entail short-term finance; medium financial requirements entail medium-term finance whilst large financial requirements entail long-term finance. Finance is the life blood of an organization. All organisation be it profit or non-profit making depend on this critical resource. All it comes round to is to make the right choices at the right time when a need for finance arises.
Currently all the small business houses or the SMEs are praising the support of commercial finance companies all over the world. Mostly these financial organizations are established to provide loan or financial support to a variety of business needs to commercial customers. They have no provision for the general people as they only target business clients. Ranging from small retail stores to the manufacturing firms can obtain loans. Professionals like doctors, dentists, lawyers, etc can also apply for loans from these lenders to expand their in-house business.
Finance has to make sure that there is enough funds in the bank at all times. The Finance Department has to communicate with each department. Finance is the part of the company that can give production enough money to more capacity, tell Marketing a budget for the year and ensure that the Research and Development team has enough money to do quality research on the products. Even though all the departments have to work together in some capacity, it's the Finance Department that is the glue to the company. Their relationship to each department is crucial because if the Finance team cannot communicate well with a certain department then every department is impacted to some capacity.
A lot of research has been done, which demonstrates that there has been a funding gap in HTSFs in last 30 years. According to Bank of England’s report on Financing of Technology Based Small Businesses, investors are more willing to lend to established HTSFs as compared to young HTSFs. This is due to opacity of information, as the borrowers have more information about the potential and nature of their business than the lender. Also there is limited information at early stage and the assets are often intangible and knowledge based. Moreover, the entrepreneurs are not willing to disclose full information about investment opportunities in technology-based firms as others might copy it.
The next small scale company advice you'll be given is approximately small business supervision loans. They are loans that are guaranteed by the federal government, meaning there's a higher potential for being accepted. The excess funding can be considered a blessing for a fresh business or a small company seeking to expand.
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...
Thesis: Businesses deem financing necessary when they are just beginning, expanding, or recovering; Debt financing and equity financning have many advantages and disadvantages but also change the entire accounting method that is to be considered while running the business.
Adelman, P. J., & Marks, A. M. (2010). Entrepreneurial finance. (5 ed.). Bedford, Texas: Prentice Hall.
Companies usually have the option to decide whether to choose a long-term loan or a bond when they are considering expanding their business. Long-term loans and bonds are somewhat similar because they both carry interest rates. Loans are borrowed from a bank with a set interest rate, while bonds are issued from the public with the company issuing semiannual payments which are done at the end of the term.
decided to start up a shop would need finance at first to just buy the
Borrow long-term loans from local banks – These are a common way of financing major purchases of an organization. An advantage is that it is directly linked to an organizations operating capacity. Another advantage of long-term loans from local banks is that it enables a firm engage in large projects. Although its disadvantage is that the banks charge high interest rates.
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Maintaining a company’s financial assets is a daunting task. Cash management techniques and short-term financing provide accounting executives with the tools needed to survive the constant changes within the economy. The combination of these tools and the knowledge of the world economy will assist companies in maintaining current assets and facilitates growth.
Both accounting and finance deal with money and assets; however, they are categorically different concepts. This portion of the essay will discuss the dissimilarities between accounting and finance. Examples of different concepts will be given for both practices.
Never have I ever climbed a mountain peak. As a child, I imagined myself conducting expeditions in deep-frozen pathways, leading amateur explorers to the top of the world, and instructing rookies in surviving harsh blizzards. Even though slightly altered, my childhood dream has been achieved. I led a team of fellow classmates, in my Strategic Management course, to the success summit of a financial competition. Over the course of a semester, I and my teammates were supposed to create and manage a company of the IT industry, in a computer-simulated environment, along with other four rival teams. I dealt with strategy and financial matters of our virtual enterprise, while my colleagues were working on marketing and manufacturing. During the four months of the exercise, I have experienced finance from various aspects: capital budgeting, through selecting favorable investment for upcoming quarters; debt management, by assessing the necessary amount and efficiency of loans; profitability analysis and dividend policy, which had been used to compile the company’s general performance index. Working in a multinational team, which included an American, a Norwegian and a Moldovan, strengthen my negotiations skills, as well as flexibility and cooperation. But above all, this experience intensified my passion for finance. Of course, a pleasant bonus was the fact that, in the end, our company’s financial performance was six times the performance of second-best team.
The information that has for financial department will determine the budget and the planning for the organization. In establish or development for the organization, the financial information that gathers will determine the size of the company.