External sources of finance (long term sources) Flashcards
Define bank loan
Provision of finance by a bank which the business will repay with interest over an agreed period of time
Define hire purchase
The purchase of an asset by paying a fixed repayment amount per time period over an agreed period of time. The asset is owned by the business on completion of the final repayment
Define mortgage
Long term loans used for the purchase of land or buildings
Define debenture
Bonds issued by companies to raise long-term finance usually at a fixed rate
Define micro finance
Small amounts of capital loaned to entrepreneurs in countries where business finance is often difficult to obtain
Benefits of leasing
- Leasing company is responsible for the maintenance and repair
- Payment does not need to be payed immediately
Benefits of hire purchase
- Cost is spread over time
Benefits of debentures
- Cash is available immediately
- Doesn’t dilute control of the company
- Interest rates are fixed
Pros of mortgage
- A large amount of cash does not need to be taken out to pay for land or building immediately
Limitations of bank loan
- It is hard for sole traders to obtain bank loans
- Added cost to the money borrowed
Limitations of leasing
Business does not own the asset
- Interest rates are higher than other finance options
Limitations of hire purchase
- Repair and maintenance is financed by the business
- Interest rates are higher than other finance options
Limitations of mortgage
- Interest rates
Limitations of debentures
- Interest rates
- It is not secured by collateral (collateral are non-current assets offered as security again borrowing)
- May increase financial leverage which reduces the ability of the business to borrow in the future
