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Source of Finance - Essay Example

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Overdraft financing is obtained by overdrawing the business' bank account so as to make pavements to suppliers or to settle other operating expenses. This facility will enable the business to obtain a short-term loan despite the fact that in theory the amount loaned is repayable on demand.
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Source of Finance
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Download file to see previous pages However interest on overdrafts is usually greater than interest on other loans and banks even charge an overdraft facility fee. The company should therefore put all these in to consideration and make sure that the benefits to be achieved from the overdraft outweigh the costs associated with taking the overdraft.
Also, overdrafts do not cover all financing requirements. The company should therefore assess whether its financing requirements are long-term or short-term. If short-term, then an overdraft can be a right source of funding but if long-term then an overdraft would be an inefficient way to raise funds since the overdraft would be required on demand by the bank. If that be the case the company might go into financial distress and subsequently bankruptcy.
In addition, collateral security might be needed by the bank in the form of a tangible fixed asset or against personal guarantee provided by the directors. It this case, the company should consider the nature of its fixed assets and asses which assets it can put up as collateral. Another determining factor for the overdraft is the firm's cash flows, timing and receipts of payments, sales trends and other cash flows. By carefully analysing all these information the company would be able to arrive at a better conclusion as to whether to engage in the overdraft or not and if the answer is yes, the amount and when the overdraft is to be repaid.
Before engaging in an overdraft, therefore, the company has to carefully study the costs of the overdrafts and benefits from the investment it wants to finance with the overdraft. Should the costs outweigh the benefits then it should not engage in the overdraft. However it should engage in the overdraft facility only if the benefits substantially exceed costs. (
Existing shareholders
The company can also raise the much needed 10000-euro through equity finance Finance raised from shareholders in the form of ordinary shares and reserves, as opposed to non-equity and to borrowing. (John and Nicolas, 2005)
Handy Andy's corner shop can also raise its 10,000euro by making contact with a business angel. ...Download file to see next pagesRead More
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