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Where to get the finance from Where a business decides to get its finance from depends on:- 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. |