get through periods when cash flow is poor for seasonal reasons, eg during a rainy summer for an ice cream seller
bridge the gap when a large payment is delayed, leaving the business without enough money to pay its bills
provide extra cash to pay for the manufacturing required to meet sudden or unexpected changes in customer orders
Overdrafts
are one of the most common forms of finance. However, they should be used carefully and only in emergencies as they can become expensive due to the high interest rates charged by banks.
variable interest rates - the money will change when the interest rate changes
flexibility - a business uses its overdraft only when it needs to, therefore the business will only pay interest when the overdraft is used
the bank can demand full payment - banks can demand full repayment of an overdraft within 24 hours
Trade credit
must be agreed with a supplier and forms a with them. This source of finance allows a business to obtain raw materials and stock but pay for them at a later date. The payment is usually made once the business has had an opportunity to convert the raw materials and stock into products, sell them to its own customers, and receive payment.
Common terms and conditions of a credit agreement include:
credit limit - the maximum amount of credit available to the business
credit period - the length of time the business has to pay what is owed, usually 30, 60 or 90 days
frequency of payment - how often payment is required, usually monthly
method of payment - the way in which the business makes payment (eg bank transfer, cheque or card payment)
retrospective discount - a discount given when the business has purchased a certain amount of stock or raw materials
Short-term finance is used to help a business maintain a positive cash flow close cash flowThe movement of money in and out of the business.. For example, it can be used to: get through periods when cash flow is poor for seasonal reasons, eg during a rainy summer for an ice cream seller.
Retained profit. A business can hold back profit each year from its shareholders close shareholderA part-owner of a business. to reinvest into the business. ...
Share capital is money raised by shareholders through the sale of ordinary shares. Buying shares gives the buyer part ownership of the business and therefore certain rights, such as the right to vote on changes to the business.
Retained profit is profit that has been made by the business in previous years that is then reinvested back into the company. Advantages. Disadvantages. Does not need to be repaid. For profits to build up to use in this way can take too long and good business opportunities missed.
The main sources of short-term financing are (1) trade credit, (2) commercial bank loans, (3) commercial paper, a specific type of promissory note, and (4) secured loans.
Larger businesses may choose to become a public limited company (Plc). In a Plc, shares. are sold to the public on the stock market close stock marketA centralised market where business shares are traded.. People who own shares are called 'shareholders'.
Crowdfunding involves a large number of people investing small amounts of money in a business, usually online. Commonly used crowdfunding websites include Crowdfunder, GoFundMe and Kickstarter. Advantages of crowdfunding include: It acts as a form of market research.
Disadvantages: it can be complicated and expensive and there is the possibility of losing control, as anyone can buy shares. the profits are paid to shareholders and the business records are made public.
What type of Source of Finance is Crowd funding? Crowdfunding is a short-term source of finance. To better explain it let us consider the following key ideas in short-term sources of finance. Short term sources of finance allow funding for not more than 1 year.
Short-term financing is the use of credit that is repaid in one year or less. Credit is often used because it is more convenient than keeping cash on hand for payments or because cash flows can be uneven at different points in time.
Short-term sources of finance will be needed to meet unexpected costs or to pay bills and suppliers. These are likely to be relatively small amounts and are rarely needed beyond a year.
Short-term refers to funds that generally have to be paid back within a year. Medium-term financing usually requires funds to be paid back between one and five years; whilst long-term finance is generally anything that is paid back after five or more years.
Introduction: My name is Velia Krajcik, I am a handsome, clean, lucky, gleaming, magnificent, proud, glorious person who loves writing and wants to share my knowledge and understanding with you.
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