BUSINESS FINANCE
In this chapter we will look at:
• Why a business needs Finance
• Internal v External Finance
• Short Term/Medium Term/Long Term Finance for a Business
Debtors v Creditors
BELIEVE IT OR NOT….SOME OF THIS STUFF WILL BE
REVISION OF WHAT WE LOOKED AT IN PREVIOUS
CHAPTERS
Medium (1-5) or Long Term (5+) and paid back over many years
PUT THE FOLLOWING INTO SHORT-TERM/
MEDIUM- TERM/ LONG- TERM EXPENDITURE
Short Term
Wages
Medium Term
Electricity Bill
Land
Petrol
Photocopier
Factory
Buildings
Stationary
Long Term
Delivery Van
Furniture
Nuclear Power Plant
Computer
INTERNAL VS EXTERNAL
• A business will match its source of finance to expenditure. There is no point in taking out a
mortgage to buy a pencil for your desk or trying to use a credit card to pay for a few acres of
land.You assess what you need and what source of finance suits you best.
• Therefore, you must decide what source of finance you will use that will best benefit your
company. These sources can be internal- as the money comes from inside the company )e.g.
profits/ shares, or external- as the money comes from outside the company- e.g. bank loan.
Firms Own Cash
Internal
Creditors
External
Short-Term Finance
Factoring of Debtors
External
Bank Overdraft
External
Short- Term Finance
Internal: Own Cash: This is the firm using their own money available to pay for goods and
services. You should take into account the opportunity cost of having the money in the bank
earning interest.
Leasing
External
Medium-Term Finance
Hire Purchase
External
Term Loan
(External)
Medium-Term Finance
Internal: Medium Term Loan: Borrowing money from the bank to purchase an
assest. Be mindful of interest rates
Debentures
External
Shares
Internal
Long-Term Loan
External
Retained Profits
Internal
Long- Term Finance
Grants
External
Sale and Leaseback
External
Long- Term Finance
Shares: The firm sells shares to the public and uses the cash to pay for things.
Any profits made are shared to the public
Long-Term Loans: This would be like a mortgage over a period of over 20 years.
Repayments would need to be paid
Retained Profits: This is putting the firms profits back into the company
Debentures: A certificate issued that is secured against a long term debt. Interest is also paid
Sale and Leaseback: This is the selling of an assest and leasing back over time.
The firm receives a large injection of cash and the rent back the property.
Grant: This comes from the government. It is used to set up or expand the business