FINANCE

Long Term Finances:

Government:

Government lends for longer time period for businesses who are suffering
Convenient rules and regulations
Low interest
Flexible
Rare availability since government does not lend to every one

Shares:

No need to repay them
No interest rate
More the share holders of a firm, more the sharing in profits

Mortgages:

Sometimes businesses use their extra land or building as a guarantee for taking loans
The borrower agrees that incase of nonpayment the bank is allowed to take over the mortgaged property
High interest rate
Available to those only who have extra property to be mortgaged
Inflexible time period
Business is safe in case of non payment

Loans:

Low interest rate
Not available for small businesses
Only for large businesses who are well established
Inflexible time period
Money cannot exceed the defined limit

Debentures:

Temporary securities issued by Public Limited Companies
The person who buys the debenture gets a fixed interest
PLC’s reserve the right to buy back the debentures after a finite time period, after paying interest
Issued to the general public
PLC’s formulate the rules themselves

Sale and Lease Back:

If a firm is short of money, it can sell off its fixed assets e.g. building
Thus it will immediately get a large sum of money in hand
It can then lease back that building
This way it will have to pay a small amount as rent every month and remaining money could be used for further purposes

Mid Term Finances:

Over Draft:

An agreement to allow a customer to withdraw cheques when necessary, which will put his account to debit
The amount up to which he can withdraw is decided earlier
High rate of interest
Interest charged on daily basis
Short term loan – for a few days
In case of nonpayment, bank has to go for legal methods
Less formalities – no need to fill forms etc

Factoring:

Businesses sell their assets e.g. extra building
No interest
No pay back
Decreases assets of firm – sense of insecurity

Hire Purchase:

After paying a small amount as down payment, customer can pay the remaining amount in installments
3^rd party is involved which buys the product from the manufacturer and gives it to the customer on credit
In case the customer fails to pay on time, the goods are repossessed
Suitable for durable capital goods such as vehicles

Trade Credit:

Borrowing goods on credit from seller and delaying the payments with interest – no 3^rd party involved
In case of nonpayment, goods cannot be repossessed so legal procedures have to be applied
Ownership and possession both lie with the borrower
Interest has to be paid

Self Financing:

Retained Profits:

Usually firms retain 10% of their profits
No interest has to be paid
No need to pay back money
Not a very large amount
Sense of insecurity once retained profits have been used

Savings:

All what a person has saved throughout in life
No interest
No need to pay back
Not a very large amount
Sense of insecurity once savings have been used

Friends and Family:

Money is borrowed from friends and family
No interest
Flexible time period
Unreliable and undocumented
Only small sum of money available

Business Finance:

Capital:

Fixed Working

Part of the capital of a firm amount of capital used

tied up in the form of fixed to meet day to day

assets e.g. building expenses of firm such

Stationery

Turnover:
The total value of goods sold in a year
Turnover = gross sales – goods returned – allowance
Rate of turnover or rate of stock turn is the number of times the average stock can be sold off

Profit:

Gross Profit Net Profit

Over all profits on trading true profit obtainable from trading

Gross Profit = net sales – cost of Net Profit = Gross Profit – expenses goods sold