Business Studies – 5.1.1 The need for business finance | e-Consult
5.1.1 The need for business finance (1 questions)
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Sources of Finance for Expansion:
To fund the expansion of a retail business, several sources of finance are available, categorized as either short-term or long-term. The choice of finance depends on the amount needed, the business's financial stability, and the desired level of control.
Short-Term Finance: These are typically needed to cover immediate expenses and working capital requirements. Examples include:
- Trade Credit: Obtaining goods or services from suppliers and paying for them at a later date. Advantages: Convenient, no immediate cost. Disadvantages: Can be expensive if discounts are not taken, potential impact on supplier relationships.
- Overdraft: A bank facility that allows the business to spend more money than it has in its account. Advantages: Readily available, flexible. Disadvantages: Interest charges can be high, can be withdrawn at short notice.
- Short-Term Loan: A loan from a bank or other financial institution with a repayment period of less than a year. Advantages: Relatively easy to obtain, fixed interest rates possible. Disadvantages: Interest charges, requires collateral in some cases.
- Working Capital: Using profits retained from operations to fund day-to-day expenses. Advantages: No interest payments. Disadvantages: Reduces profits available for other purposes.
Long-Term Finance: These are used for investments that will benefit the business over a longer period. Examples include:
- Share Capital: Raising money by selling shares in the business to investors. Advantages: No repayment required, brings in expertise. Disadvantages: Dilution of ownership, potential loss of control.
- Long-Term Loan: A loan from a bank or other financial institution with a repayment period of more than a year. Advantages: Can fund significant investments, fixed interest rates possible. Disadvantages: Interest charges, requires collateral.
- Mortgage: A loan secured against a property. Advantages: Suitable for purchasing property, often offers lower interest rates. Disadvantages: Risk of losing the property if repayments are not made.
- Retained Profit: Reinvesting profits back into the business. Advantages: No interest payments, demonstrates financial stability. Disadvantages: Reduces profits available for dividends.
The best choice of finance will depend on the specific circumstances of the business. A combination of different sources may be used to fund the expansion.