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

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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…
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Understand the Sources of Finance Available to a Business
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In every business, the availability of finances is an inevitable need. 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. ...
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 ...Download file to see next pagesRead More
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