2.1.11 Financial Plan: Sources of finance

Question 1

1. Our long term
   source of
   finance is
2. Definition
3. Two advantages are
4. Two disadvantages are

Answer 1

1. Our long term
   source of
   finance is :
   Long-term borrowing

Definition of long-term borrowing:

Funds borrowed for longer than 2 years to finance real state, plant and equipment. For example, mortgage the most common long-term borrowing.

Two advantages are:

1. Greater flexibility and resources to fund capital needs
2. Reduces dependence on any capital source

Two disadvantages:

1. Monthly payments for an extended period of time
2. Higher interest rates because there is more time for them to rise

Question 2

1. Our short term
   source of
   finance is
2. Definition
3. Two advantages are
4. Two disadvantages are

Answer 2

Our short term
source of
finance is:
Short-term borrowing

Definition of short-term borrowing:

Provided by financial institutions through bank overdrafts and used to finance temporary shortages in cash flow or finance working capital.

Two advantages:

1. You don’t have to renew your loan periodically
2. Less money than a long-term borrowing

Two disadvantages:

1. More dependent on capital source
2. Don’t always solve the underlying problem

Question 3

3. Discuss one internal and one external source of finance that you considered in the business
   you developed as part of the Online Social Enterprise Business (OSEB) project.

Answer 3

Equity finance (internal sources of funds)

The funds contributed by the business owners to start and then expand the business

Equity was chosen because

1. It doesn’t have to be repaid unless the owners leave the business
2. It is cheaper because there are no interest payments

External sources of finance: debt finance

Funds provided by financial institutions, government, and suppliers and paid back over time with interest.

We choose this source of finance because

1. Increased earnings and profit