Factors affecting sources of finance

Question 1

What factors affect sources of finance?

Answer 1

• Short-term finance required
• Long-term finance required
• Interest rates
• Payback terms
• Size and type of organisation.

Question 2

What is short-term finance required?

Answer 2

This refers to when an organisation may only need finance for a short term, perhaps to cover a cash-flow problem, so an overdraft could be used.

Question 3

What is long-term finance required?

Answer 3

This refers to when an organisation may need long-term finance, perhaps to fund the purchase of property, so would choose a mortgage.

Question 4

What are interest rates?

Answer 4

This refers to when an organisation will choose the finance with the lowest interest rate available.

Question 5

What are payback terms?

Answer 5

This refers to the quicker the payback term, the less interest the organisation will pay on borrowing.

Question 6

What is ‘size and type of organisation’?

Answer 6

This refers to when the organisations are restricted to certain sources of finance.

For example, a public sector organisation cannot sell shares and has to rely on government funding.