Bussines Accounting - Essay Example

Some banks also charge a fee for overdraft facility. It should be noted that an overdraft is specifically meant for short-term requirements of a firm and it does not act as a long term capital. Sometimes the bank asks the firm to provide a guarantee and security to the overdraft availed. As discussed above that overdraft facility is primarily availed for short-term liabilities like accounts payable, so expanding the business through overdraft is not a good plan. 2. A long term loan from financial institution This is a most common way in which SME’s expand their business.

As SME’s don’t have the luxury of raising money through issuing securities, the most prevalent way is to take a long-term loan from a financial institution. A business term loan is the most prevalent loan for this purpose. The bank would require financials of the firm for 3-5 years at least and with a guarantee to mark lien. A loan from bank would be passed if the current financial condition of the firm is good and acceptable to bank and the purpose for which you are taking a loan is justified.

The minimum rate at which a long-term loan could be financed is a base rate of prime lending rate. However the actual rate at which ban sanctions the loan could be higher than that depending upon the risk bank is taking in investing, the amount of loan availed and the credit history of the firm. I would suggest my friend to expand by the way of obtaining long term loan from a bank. This also provides significant tax shield. 3. A Finance Lease Agreement A lease agreement is considered as the agreement between the owner and the party intending to use that property conveying the right use of the property.

Lease does not includes contracts for services, exploring and exploiting natural resources and licensing agreements for items like patents and trademarks. The advantages of leases are as follows: Immediate cash outflow is not required by the lessee for leasing the asset. A purchase option allows the lessee to obtain at the bargain price at the expiration of the lease. The lessee is able to obtain 100% financing. Flexibility for use of funds for tax benefits. Leases can also be structure for allowing manipulation for calculating tax benefits at the end of the year.

Though lease remains an important source of expanding through leasing property, plant and equipment but the clauses in lease can go against and it can be used for buying PPE only. It cannot be used for financing current assets of the company 4. A hire purchase agreement for the necessary non-current assets required in the expansion Hire purchase is considered as the term for a contract wherein a firm or an individual agrees to pay for the goods in installments, parts or in a percentage over the period of time.

This looks somewhat like leasing for goods and services. In comes into effect when a firm cannot pay for the property at once but is agreeing to pay in installments for the same. It is recommended to go through hire-purchase for financing non-current portion of assets. 5. Formation of a Partnership Another way of obtaining finance for a firm is through formation of a partnership. Though this looks a good idea at one but lot of things are to be taken consideration off. Firstly, forming a partnership will bring money in the business which is required for expansion but it will dilute the holding of my friend. Suppose a