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 Wages Land Electricity Bill Furniture Delivery Van Petrol Factory Buildings Stationary Nuclear Power Plant Computer Photocopier

What will a bank look for to supply a business finance? Credit Worthiness Amount and Duration of loan Purpose of the loan Ability to meet repayments Business Plan Collateral

Selecting a source of finance A business should always look at: Amount: Example an overdraft for €200, a long term loan for €200,000. A business needs to ensure they select the best source. Cheap items may be suitable to short term finance, and more expensive ones to long term finance Cost: Factors such as interest rates and repayment structures should be taken into account- generally the cheaper the better. A wise business shops around Risk: What collateral (security on the loan) is required and what do you lose if you cannot meet the repayment

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 Short-Term Finance Bank Overdraft External Creditors External Factoring of Debtors 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 Term Loan (External) Hire Purchase External

Medium-Term Finance Internal: Medium Term Loan: Borrowing money from the bank to purchase an assest. Be mindful of interest rates

Long- Term Finance Debentures External Shares Internal Sale and Leaseback External Long-Term Loan External Long- Term Finance Retained Profits Internal Grants 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