Understand the Sources of Finance Available to a Business - Essay Example

Task: Understand the Sources of Finance Available to a Business Task In every business, the availability of finances is aninevitable need. Of vital necessity is the availability of finance for capital to start the business. Long term financial needs include the purchase of fixed assets, financing permanent portion of the working capital and for financing the growth and expansion of the business. Short-term business financial needs include payments of its human resources, offsetting available short-term debts, for purchases and other core operations of the business as those in the petty cash book operations. Trade credits are sources of finance for business. These are credits given by suppliers to manufacturers or traders, who pay for the goods after sales. The business, therefore, can acquire goods without paying for them instantly. Trade credits are advantageous since the business makes payment after the expiry of the period given. It is disadvantageous since there is no extension of the arrangement after the expiry period. Commercial banks may grant bank credits to a business, which act a source of business finance. The credit is useful for starting or expanding the business. The possibility of extension of bank credits’ payment period makes it advantageous as a source of business finance. The need for collateral to get bank credits forms one of its disadvantages. Bill discounting is another source of business finance. Banks deduct discounts during payments, equal to the remaining period’s interest. It is advantageous since cash is available immediately to the business. It, however, turns disadvantageous when the business is not credit worthy. It uses the business’ credit-worthiness to grant finance to the business. Customer advances are sources of business finance. These are advance payments made by the customer, mainly on large orders. It is advantageous since it does not need tangible security. The limited nature of the amount advanced by the customer on grounds of order value makes it disadvantageous as a source of business finance. The business, therefore, may not receive a large amount of finance using this source. Installment credits offer a good source of business finance mainly for purchasing high cost assets. It involves paying a small portion of the cost of purchase and settling the balance on installments. This is advantageous because there is delivery of the asset after paying the down payment. Other payments, therefore, comer later and the business has time to acquire finances. It, however, is disadvantageous because the business is under obligation to pay the installments whether it makes losses or have profits. The business constrains to pay the installments, in case of losses. Finance from co-operatives is a source of business finance. They can help in coming up with short-term finance and such loans need little security. They are advantageous because small business can avail them easily. It is disadvantageous since its availability is limited to co-operative members. Issuance of shares is a good source of business finance, mainly for long-term use. A business may issue preference or equity shares. Contrary to equity shares, preference shares have preferential rights. Shares have several merits. It is a reliable source of additional capital. Shareholders are also able to earn dividends from their investments. The demerits of shares may occur when equity shareholders, who have voting rights, take control of the business. This may bring the possibility of conflict of interest that may hinder a company’s smooth functioning. Debentures are loan certificates issued to the public. They are financial source if the business needs a large amount of funds. A business may have redeemable, irredeemable, convertible, or non-convertible debentures. The advantage of debentures as a source of finance for the business is the lack of control overs the business by debenture holders. It is reliable as a source of finance for business. The greatest disadvantage of debentures is the payment of interest on debentures, regardless of losses or profits for the business. The business, therefore, may have constraints when it makes losses. Among the source of business finance, some have legal implications. Taking loans from banks requires a legal agreement made between the parties (business and bank). Failure to pay the loan calls for legal actions. The assets of the business may be used to pay off the loan. Assets acquired on hire purchase terms also involve legal agreement. The assets are subject to repossession upon failure to pay the installments. Other sources of business finance have control implications on the business. They may impose control on the management of the business and interfere with the control functions of the management. Shareholders with voting rights, for instance, may have control implications on the business. Some sources of business finance may have bankruptcy implications on the business. The business may face instances when it withdraws more than the deposits it has in its bank account. For instance, despite the business making losses, it has the obligation to pay interest to debenture holders. It also has to pay installments already existing. These situations may force the business into conditions when it makes overdrafts. This makes the business bankrupt. It is noteworthy that various sources of business finance have financial costs and implications. Issuing shares would require the business to engage in advertisements. This involves costs of advertisements. Discounting of the bill would require the business to pay interests, which has cost implications on the business. Choosing an appropriate source of finance for a business’ project would require several considerations. Should the business need to expand its initial capital, it needs to issue shares. The business, however, has to consider its size. It the business needs to purchase assets worth great value, it will opt for installment credits. The business should consider its ability to pay the installments for the full period of payment. If the business needs finance for expanding its operating capital, it may opt for c-operative loans as a source of finance. The business should consider whether it holds membership in the cooperative. The business may opt for a bank loan, of which it should consider its creditworthiness to receive the loan. Finance is important for the operations of businesses (Dlabay and Burrow 19). There are various sources of finance for a business. Some sources of finance may have legal implications. For instance, bank loans. There may also be control implications of some sources of finance. These include share, where shareholders have voting rights. Some business finance sources also have bankruptcy implications such as installment credits when the business makes losses. Other sources may also have financial cost such as advertisement costs for attracting shareholders. For every business, considerations should exist to come up with appropriate source of finance for business. Task 2 Financial planning in business is a core need. It helps provide a guide for the overall operations of the business. It involves preparation of financial reports and their subsequent analysis. It also helps determine the need for expansion and enhancement in business. It helps in monitoring business assets. Through the financial reports, the business can monitor the expansion of the business assets. Financial planning enables understanding of the business’ income, its profits and the losses incurred. It also helps the business identify the best ventures according to their profitability. Financial planning makes the business proactive by gaining the ability to predict the possibility of incurring losses. Failure to undertake financial planning would lead to unpredictable performance of the business. Dissemination of information to different decision makers in the business enables harmony in the management of the business. It ensures coordination of the business activities. Shareholders in the business need information on the progress of the business to decide on which shares to invest in. The management of the business needs information on profits and losses of the business to determine the effectiveness of the various management strategies and undertake improvements on them. If R Riggs L.t.d obtains a 2-year interest free loan, it will increase the business’ long-term liabilities. This reduces the net assets of the business. A five-year loan obtained by R Riggs L.t.d would increase its long-term liabilities. This reduces the business’ net assets. The interest payable on the loan would also increase the business’ expenses and reduce the net profit. A one-year line of credit with a purchaser increases the R Rigg’s current liabilities. This reduces the net current profits. Issuing additional 1,000 shares at 3.50 dollars would increase the business share capital and further increase the net profit. Selling office furniture at no profit would reduce the business’ fixed assets and reduce the net assets value. Works Cited Dlabay, Les and Burrow, James. Business Finance. Kendallville, IN: Cengage Learning, 2007. Print. Read More