Key Sources of Business Finance
Long-term
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Medium-term
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Short-term
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Finances whole business over many years
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Finances major projects or assets with a long-life
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Finances day-to-day trading of the business
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Examples:
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Examples:
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Examples:
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Share capital
Retained profits
Venture capital
Mortgages
Long-term bank loans
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Bank loans
Leasing
Hire purchase
Government grants
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Bank overdraft
Trade creditors
Short-term bank loans
Factoring
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What is Debt Finance?
Debt financing means borrowing money from an outside source with the promise of paying back the borrowed amount, plus the agreed-upon interest, at a later date
Main sources of debt finance are:
- Bank Loan
- Bank Overdraft
- Credit Card
- Mortgage
- Peer to Peer Lending
- Corporate Bond
Key Features of Bank Loans
- Loan provided over fixed period (e.g. 5 years)
- Rate of interest is either fixed or variable
- Timing and amount of loans repayments are set by the lender
- Usually some security required for the loan - lowers the risk
- Unsecured loans pay higher interest rate because of risk
- Non-performing loans occur when the borrower is unable to repay some or all of the debt
Benefits and Disadvantages of Bank Loans
Benefits
- Greater certainty of funding, provided terms of loan complied with
- Lower interest rate than a bank overdraft
- Appropriate method of financing fixed assets
Drawbacks
- Requires security (collateral)
- Interest paid on full amount outstanding
- Harder to arrange
- Startups and small businesses often excluded
Bank Overdrafts
- Short-term finance, widely used by businesses of all sizes
- An overdraft is really a short-term facility – the bank lets the business “owe it money” when the bank balance goes below zero
- A flexible source of finance: only used when needed
- Excellent for helping a business handle seasonal fluctuations in cash flow or when the business runs into short-term cash flow problems (e.g. a major customer fails to pay on time)
Benefits and Disadvantages of Bank Overdrafts
Benefits
- Relatively easy to arrange
- Flexible – use as cash flow requires
- Interest – only paid on the amount borrowed under the facility
Drawbacks
- Can be withdrawn at short notice
- Interest charge varies with changes in interest rate
- Higher interest rate than a bank loan
