Accounting and finance within a business environment - sources of finance Flashcards
what are the short term sources of finance?
- overdraft
- trade credit
- factoring
- hire purchase
what is an overdraft?
an extension of credit from the financial institution that is granted when an account reaches zero (should only be used when needed e.g. short term cash-flow issues)
like a credit card
what are the advantages of overdrafts?
- relatively easy to arrange
- flexible
- interest is only paid of amount borrowed under the facility
what are the disadvantages of overdrafts?
- interest charge varies with changes in interest rates
- higher interest rates than bank loans
what is trade credit?
amounts owed to suppliers for goods and services supplied on credit and not yet paid for
longer creditor days
what are the advantages of trade credit?
- improved cash-flow management (allows business to acquire goods w/o instant cash flow going out)
- flexible in payment
- preservation of working capital
define working capital
cash used in the day-to-day trading in a business
what are the disadvantages of trade credit?
- could get into debt - owe to creditors
- suppliers may start insolvency proceedings
- expensive if pay date is missed due to interest
- some suppliers may refuse credit to start ups
what is factoring?
a way a business can raise cash by selling their sales invoices to a third party (factoring company) at a discount
what are the advantages of factoring?
- receivables (amounts owed by customer) turned into cash quickly
- business can focus on selling rather than collecting debts
what are the disadvantages of factoring?
- quite high costs (discount offered to F. company)
- customers may feel their relationship with the business has changed
what is a hire purchase?
method of buying goods through making instalment payments overtime
what are the advantages of hire purchasing?
- flexible
- wide range of assets can be financed
what is the disadvantage of hire purchasing?
- overall cost if higher than buying outright (up-front)
what is leasing?
a form of renting an asset, giving beneficial use of the asset without owning it
what is the main difference between hire purchasing and leasing?
leasing is when the asset is owned by the lessor (grants a lease)
hire purchasing is when the asset is owned by the business
what are the advantages of leasing?
- predictable cash flow
- asset owner carries risk
- lower interest than bank loan
- machinery is fixed easily
- less security is required
- widely available
what are the disadvantages of leasing?
- more expensive than buying asset outright
- don’t own the asset
- some long-term leasing contracts are difficult to cancel
- might need an up-front deposit
