Sources Of Finance Essay

Sources of finance

A few sources of finance are short term and ought to be paid back within a year. Other sources of finance are long term and can be paid back over several years.

Internal sources of finance are finances discovered within the business. For example, profits can be reserved back to finance growth. On the other hand, the company can sell items it owns that are no longer required to free up money. External sources of finance are discovered exterior the business, for example from creditors.

Long-term sources of finance

Sources of finance to cover the long term consist of owners who invest funds in the company. For partners and sole traders this can be their savings. For businesses, the money invested by shareholders is named share capital. Another long term source of finance is loans that can come from the bank or either family or friends. Furthermore, another long term source is debentures which are

If you have long-term financing in place, that will mean you have stability and will not require looking for financing frequently as compared to short-term financing. It also means that it will be much simpler to plan your income and cash flows as you can recognize what your interest costs will be monthly. Short-term financing does not present you those benefits, as you have to continuously renegotiate the conditions of your agreement.

A disadvantage of long term sources of finance is fixed rates. Once you are locked into a long-term contract, it may be tough to get out of it. If interest rates fall, you will not be capable of renegotiating depending on how you setup your financing contract. You may setup your agreement in a approach that your able to prepay if rates go down. You may possibly also setup a variable rate agreement where your rate alters based on the interest rates. Nevertheless, that may be awfully dangerous as it will give you a lot of downside risk if interest rates