Where to get the finance from
Where a business decides to get its finance from depends
Amount of money required – a large amount of money is
not available through some sources and the other sources of
finance may not offer enough flexibility for a smaller amount.
How quickly the money is needed - If money is needed
quickly (say if had to pay a big wage bill which if not paid
would mean the factory would close down) the business may
have to pay higher charges.
The cost of the finance - Different sources of finance cost
different amounts of money e.g. money from retained profits
(ie from within the business is free, an overdraft from a bank
is very expensive!).
The length of time of the requirement for finance - a good
entrepreneur will judge whether the finance needed is for a
long-term project or short term and therefore decide what
type of finance they wish to use.
Short Term and Long Term Finance
Short-term finance - is needed to cover the day to day
running of the business. It will be paid back in a short period
of time, so less risky for lenders. Usually thought of as
finance needed for up to 1 year
Medium term finance - Finance needed for up to 5 years
Long-term finance - tends to be spent on large projects that
will pay back over a longer period of time. Lenders will ask for
some form of insurance or security if the company is unable
to repay the loan.
A mortgage is an example of secured long-term finance.
Finance for more than 5 years.