Financial Information

Financial information

Example of sources of finance

Finding sources of financing for a start-up business is always difficult and in the current economic climate, it is even harder than usual. It doesn`t matter if you are looking for debt or equity financing to start up your business.

Own finance: You may choose to start your own business using your own financial resources. This may be from savings accounts or other investments that you have.

Family and friends: You may have family and friends who wish to invest in your business. This is often convenient and may allow you to get finance on favorable terms. However, make sure you have a formal agreement of loan terms in place so you or your family and friends are not left unprotected in the event that you are unable to repay the loan.

Banks: The most common forms of finance used by start-ups are:

Term loans: Loans are designed to help you buy equipment and supplies for your business. They are best if you need to buy fixed assets, such as machinery or office equipment, where the amount you need is not going to change.

Loans: It is not just banks that can provide a loan. Business support organizations such as enterprise and development agencies can help businesses looking for loans.

Short, medium and long term loan within an organization

A bank loan should only be used when finance is required for a known period. Ideally that period should relate to the life of the asset or the purpose of this funding in the business. Loan can be obtained for short-term, medium-term or long-term finance. If the repayment conditions are not met then the lender will take action to get back the amount. The cost of this form of finance is known in advance as interest starts from the time the business borrows the money without regards to the time of its use. (Aidan Berry, 2005)

Short Term Sources of Finance: Short term sources of finance are usually used to provide additional working capital which is needed to fund the day to day activities of a business. These activities may include replacing stock which has been sold and therefore converted back into cash. Short term finance is generally considered to be over a period of one year or less. These sources of finance include:

Overdrafts: This is a type of bank loan is set up on an account which can be used if required to provide additional working capital for a short period of time when there is a cash deficit. It is tends to attract a high interest rate which makes them quite expensive. If the business needs money for a fixed period of time which is less than one year it could be more appropriate to set up a short term loan from a bank or even borrow money from family or friends. Banks may charge a setup fee for a bank loan and will be paid back in installments.

Trade credit: This is provided by trade creditors who are a supplier whom the business has purchased goods or services from on a credit basis. This means that the business does not have to pay its supplier straight away and has until the end of the credit period to pay for its purchases. The credit period is a length of time specified by the supplier which is based on a business s credit rating. This is usually between thirty and ninety days.

Factoring: This is where finance is raised against trade debtors. These are customers who have purchased goods or services from a business on credit but have not yet paid and have usually breached their credit terms. A factoring organization which is usually a bank or another financial institution will assess how credit worthy the debtors are and proceed to attempt to collect the debts on behalf of the business.

Medium Term Sources of Finance: Medium term sources of finance are usually repaid over a period of five to seven years. This is usually used to purchase assets that are expected to generate income for the business over the medium term which may include office equipment, plant, fixtures and fittings or vehicles. These sources of finance include:

lt;b>Medium term loan: This could be obtained from a bank, a government scheme or friends and family. It would most likely be used to purchase an asset over a fixed period of time which will be linked to the expected economic life of the asset.

Leasing: are usually paid monthly or yearly. A business may use this option is the residual value of an asset is likely to be uncertain when it comes to selling the asset or if an asset is only required for a certain period of time.

Hire purchase: This is a more flexible approach to traditional borrowing. HP allows a purchaser to start using an asset as soon as a deposit has been paid. This type of finance can carry quite a high interest rate but may be better for a business as payments are spread out over time.

Long term sources of finance: are used to obtain assets that are expected to provide economic gain or benefit to the business in the long term. This type of finance is usually considered to be longer than seven years and can be divided into two categories which are debt finance and equity finance:

Long term loan: This would be suitable for capital investment in fixed assets such as plant and machinery or to expand the business.

lt;b>Mortgage: A form of long term loan that is used to purchase land or premises. A mortgage in usually provided by a financial institution such as a bank or building society. They have a specified time frame over a number of years where the loan has to be paid back which is usually around twenty-five to thirty years.

Debenture: is usually made in full at a fixed date in the distant future. The holder of the debenture could be a private or corporate investor and typically receives a fixed rate of interest. Debentures are lower risk for the investor than an equity agreement and can be sold on the stock exchange.

Financial documentation within an organization

A business uses financial documents to stay within its budget, prepare budget proposals and file tax returns. These documents include receipt records, payroll reports, paid bills, bank statements, income statements, balance sheets and tax reporting forms. These documents may be prepared by the company s accountant. A business owner uses these documents to determine the financial success of the company and to identify areas that are unproductive. Financial documents are needed to

Know the profit loss of the business.

Know the assets liabilities in the ownership of the business in detail.

When applying for loans.