Finance And Long-Term Finance: Sources Of Finance

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Sources of Finance Sources of finance are the different methods for a business to earn and obtain money. There are lots of ways to obtain money but two large basic sources of finance, which are the “owner’s capital” and “capital borrowed”. They are also called internal sources of finance and external sources of finance. In those sources, they are mainly divided in two groups, which are short-term sources of finance and long-term sources of finance. Short-Term Finance Short-term finance is an amount of money, which is borrowed, will be repaid in one year. (Nickels, McHugh, McHugh, N.D.) Long-Term Finance Long-term finance is an amount of borrowed money will be repaid over a specific time period which is longer than one year or into the future. (Nickels, McHugh, McHugh, N.D.) Internal Sources of Finance Internal sources are the sources of information within the company, used to compile market research as a basis for marketing decisions (ITS Education Asia, 2005). In the internal sources, some of the funds are come from the owners themselves, and some of the funds are provided by the families and friends when the type of the business firms is sole trader or partnership. Besides, those funds can also be generated from the profits of the business. In the “owner’s capital”, it involves two several ways, they are the owner’s capital, profits, retained earnings, dividend policy, credit control, reducing inventories levels, delaying payment to trade payables, sale of stock and debt collection. Internal Sources of Short-Term Finance Owner’s capital means the resources that the entrepreneur put when he starts the business. That capital can be many different things, for example machineries, equipment and money. In different forms of business ... ... middle of paper ... ...ower to wait a year or before to start to make the repayment. Somehow, some loans can be repaid at the end of the period instead of instalments. Besides, security, for example some assets and the properties of the business, is needed for the bank loan. There are three advantages in the bank loan. First, the timing and the amount of the repayment is known when getting the bank loan, so it is quite easy to budget. Second, there is also a repayment holiday, so the repayment schedule is quite flexibility. Third, the interest rates can be discussed and it can be lower than the overdraft. However, it is because the business loan is a long-term commitment, which is needed to service and this will be to high interest rate. Besides, security such as the house of the business owner is needed and this will not be good to the owner if the business is failed. (Cox, Fardon, 2009)

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