BTEC Level 3 business

Unit3
Kamal Abu Assaf

Section 1 internal sources of finance

When a business raises money from its own operations and resources—such as retained
earnings, tax benefits associated with depreciation, effective working capital management,
asset sales, better inventory and accounts receivable management, cost-cutting initiatives, and
owner savings—it is said to be using internal sources of finance. These internal funds are
generally less risky than external financing options, and they are essential for maintaining
operations, facilitating growth, and supporting various financial needs within the organization.
Owner's capital is the remaining interest in a company's assets after subtracting its liabilities. It
is also referred to as owner's equity or shareholders' equity. It is the area of the business assets
that is owned by the shareholders or owners. The original investment made by the owner(s) or
shareholders, any further capital contributions, and retained earnings (profits that have been
reinvested in the business) can all be considered parts of the owner's capital. This equity, which
is a crucial part of the balance sheet and represents the ownership stake as well as the general
financial health of the company, is used to calculate the net worth or ownership value of the
business.
Benefits of using Owner's Capital:
No Debt Obligations: Since owner capital does not entail borrowing money, the company is
exempt from having to pay interest or principal on a regular basis. This enhances cash flow and
lessens financial stress.

No Dilution of Ownership: The business's ownership is undiluted because owner capital is being
used. Owners are in complete control and are not required to give up any portion of their
earnings or decision-making power to outside investors.

Long-Term Commitment: Business owners who put their own money into the company are
frequently very dedicated to its success, which can result in a strong work ethic and a
commitment to its expansion and profitability.

Flexibility: It is easier for owners to decide when and how much capital to invest in the company
to adapt to shifting market conditions and financial needs.

Tax Benefits: Utilizing owner capital may result in tax benefits, such as capital contribution and
investment deductions, contingent on the business's structure and local tax laws.

The disadvantages of using owner capital are:

Limited Capital: The owner's personal savings or willingness to make investments determines
how much of their capital is available for investment. This may limit the company's capacity to
take on significant projects or experience quick growth.
Risk: When using their own capital, owners run the risk of losing their personal assets and
wealth. This can be particularly dangerous in the event of a business failure or other financial
difficulties. The prosperity of the company is correlated with their own financial security.
Opportunity Cost: Owners risk missing out on alternative investment opportunities that might
yield higher returns by using their own funds. This is especially important if the company needs
more capital to operate.

Limited Knowledge: Owners may be inexperienced in operating and expanding the company,
which could result in operational strategic difficulties. On the other hand, outside investors
might provide the company with invaluable expertise and experience.

Restricted Network: The networking and business contacts that external investors may offer,
which can be helpful for growth and market expansion, are not provided by owner's capital.

In conclusion, using owner capital provides financial independence, eliminates debt, and shows
a strong dedication to the company. But it can also restrict the company's ability to expand and
put owners at risk financially. Not to mention that they might lose out on opportunities and
experience that come with funding from outside sources. The unique requirements and
circumstances of the company and its owners should be taken into consideration when deciding
how to use owner capital.

Retained Profit
Retained profits, alternatively referred to as retained income or retained earnings, are the parts
of a company's net profits or earnings that are kept and reinvested in the company rather than
being paid out as dividends to shareholders. As the business makes profits, these retained
earnings build up over time and can be put to a variety of uses, including debt reduction, capital
investments, future growth funding, and covering unexpected expenses. Retained profits, which
represent the total earnings that have been held in the company since its founding, are a
significant source of internal financing for a business.

Benefits of Retained profits

Internal Financing Source: The company obtains its internal funding from retained profits. As a
result, the company won't need to rely on outside debt or equity financing, which eliminates
the need for interest payments on loans and ownership share agreements with investors

Financial Stability: Without having to borrow money from outside sources, a company can
weather economic downturns or unforeseen expenses thanks to accumulated retained profits.
Long-term sustainability depends on this financial stability.

Flexibility: Retained earnings can be used for a number of different things by the business.
These include expansion, debt reduction, capital investments, R&D, and even paying dividends
when it feels right.
No Dilution of Ownership: Because shareholders maintain their ownership stakes, keeping
profits does not reduce ownership or control over the company. On the other hand, issuing
more shares has the potential to lower the ownership percentages of current shareholders.

Tax Efficiency: Reinvesting retained earnings can result in tax benefits in certain jurisdictions
because the money is not immediately taxed as long as it stays within the company.

The disadvantages of retained profits include:

Opportunity Cost: If a company holds onto its profits, it may pass up other investment
opportunities with potentially larger returns. There is an opportunity cost involved in not giving
shareholders their profits back because the cost of equity, or the return they expect, is
frequently higher than the cost of debt.

Expectations of Shareholders: As a return on their investment, some shareholders might

anticipate receiving dividend payments on a regular basis. If profits are not paid out as
dividends, investors may become irate or disappointed.

Overcapitalization: When a business keeps too much of its profits without using them wisely, it
can result in overcapitalization, which lowers the return on equity of the business by allowing
excess capital to sit around.
In conclusion, retained profits give a company autonomy, flexibility, and stability in terms of
finances. They do, however, entail an opportunity cost, possible expectations from
shareholders, and the requirement to make sure that money is used wisely in order to prevent
overcapitalization. The unique requirements and objectives of the business and its shareholders
should be carefully considered when making decisions about the retention or distribution of
profits.

Sales of assets
The process of selling a company's tangible or intangible assets to a third party is referred to as
an asset sale or asset disposal. These assets can be intellectual property like patents,
trademarks, or copyrights, or they can be tangible things like real estate, machinery, cars, and
inventory. Selling assets can be done for a number of reasons, such as raising money, paying off
debt, maximizing resource utilization, or getting rid of non-core or underperforming assets. A
company's financial and strategic management may greatly benefit from asset sales, which can
help it generate cash, reallocate resources, or simplify processes.

advantages of Asset Sale:

Capital Generation: Selling off assets can result in an instant cash infusion that can be utilized to
finance a range of business goals, including debt repayment, business expansion, project
investment, and operating costs.
Debt Reduction: The proceeds from asset sales may be utilized to settle outstanding debt, which
will lessen the company's financial responsibilities and interest costs while also possibly
enhancing its credit standing.

Streamlining Operations: A company can increase efficiency and profitability by focusing on its
core operations and strategic objectives by selling non-core or underperforming assets.

Optimizing Resource Allocation: By allowing a business to reallocate funds and resources to

areas with greater potential for growth or better returns on investment, asset sales can improve
long-term financial health.
Risk Reduction: Asset Sales Can Assist in company reduces the risks connected to failing or
depreciating assets and offers a way out of undesirable circumstances.

disadvantages of selling assets

Loss of Revenue or Productive Capacity: The sale of productive assets, like buildings or
machinery, may result in a reduction of the company's capacity to generate revenue. This could
have an impact on the company's capacity to meet demand from clients or seize new
opportunities.

Loss of Intellectual Property: Selling rights to intellectual property may restrict the business's
future access to or use of those resources. This could have an effect on competitive advantages,
branding, and innovation.

Focus on the Short Term: Asset sales may be seen as a temporary fix for budgetary difficulties,
possibly ignoring long-term strategic objectives and innovation.
Tax Implications: Depending on the jurisdiction and asset type, there may be tax consequences
associated with asset sales, potentially reducing the net proceeds received.

Market Signals: Announcement of asset sales may not always be well received. disadvantages of
selling assets

Loss of Revenue or Productive Capacity: The sale of productive assets, like buildings or
machinery, may result in a reduction of the company's capacity to generate revenue. This could
have an impact on the company's capacity to meet demand from clients or seize new
opportunities.
Loss of Intellectual Property: Selling rights to intellectual property may restrict the business's
future access to or use of those resources. This could have an effect on competitive advantages,
branding, and innovation.
Focus on the Short Term: Asset sales may be seen as a temporary fix for budgetary difficulties,
possibly ignoring long-term strategic objectives and innovation.
Tax Implications: Depending on the jurisdiction and asset type, there may be tax consequences
associated with asset sales, potentially reducing the net proceeds received.
Market Signals: Announcement of asset sales may not always be well received.

In conclusion selling assets can help a company focus more on its core business, lower debt, and
bring in a sizable amount of capital. It might, however, come at the expense of potential short-
sightedness, the loss of important intellectual property, and lost income or productive capacity.
Selling assets should only be done after carefully weighing the financial requirements of the
business, its strategic objectives, and the effects on its long-term outlook and overall
operations.

Section 2 external sources of finance

Funds or capital raised by a company or organization from outside sources is referred to as

external sources of finance. These sources entail acquiring funds or assets from sources other
than the owners of the business or its internal operations. Usually, one can use external sources
of funding to cover short-term cash flow shortfalls, launch a new project, grow operations, or
make large investments, among other financial needs. Financial institutions' loans, grants,
bonds, trade credit, investments from outside investors, and leasing agreements are examples
of common external sources of funding. These sources can have varied degrees of risk and
influence on a company's financial structure. They frequently involve obligations, such as
sharing ownership with investors or repaying loans with interest.

Long term sources of finance:

Long-term sources of finance are the capital or funds that a company raises over a long period
of time, usually more than a year, to meet its operational and long-term investment
requirements. These sources of funding are employed for capital-intensive projects like the
purchase of fixed assets, business growth, or funding for research and development. Long-term
financing may include interest payments and is typically defined by a longer repayment period.

Mortgages:
A mortgage is a loan or other financial arrangement that is backed by real estate. A borrower
(often a homebuyer) borrows money from a lender (usually a bank or mortgage company) to
buy a residential or commercial property. This is the general format of a mortgage agreement.
Since the property is used as collateral for the loan, the lender has the legal right to take
ownership of it through a procedure known as foreclosure if the borrower defaults on the loan.

Advantages of using mortgage:

Spread-Out Repayments: Mortgage repayment terms are usually quite long, ranging from 15 to
20 to even 30 years. By spreading out their payments over a longer period of time, businesses
can lessen their immediate financial burden and free up capital for other operational
requirements.
Consistent Payments: Since the interest rate on a fixed-rate mortgage stays the same for the
duration of the loan, this feature makes monthly payments predictable. Businesses find it
simpler to plan ahead and budget for their financial obligations due to this predictability.

Leverage and Appreciation of Assets: Companies can obtain financing by leveraging the
potential appreciation of their real estate holdings over time. The company's equity in the
property rises in tandem with the property's value, giving it more financial flexibility.
Tax Benefits: Businesses may be qualified in certain jurisdictions. for tax deductions connected
to property depreciation and mortgage interest payments. The total cost of financing through a
mortgage may be lowered as a result of these tax advantages.

Ownership and Control: Businesses are able to keep ownership and control of the property by
using a mortgage. In contrast to leasing, which involves the business as a tenant, property
ownership offers independence and the possibility of long-term cost savings.

come Generation: By renting out a portion of their own real estate, businesses may occasionally
be able to make rental income. This rental income can increase the company's revenue and help
pay off the mortgage.

Possibility of Equity Buildup: As mortgage payments are made over time, the amount owed on
the loan drops and the company accumulates equity in the asset. Either by selling the property
or by refinancing, this equity can be used to meet future financing needs.

Stability and Security: By lowering the possibility of lease terminations, rent increases, or
changes in the property owner, owning the real estate utilized for business operations offers
stability and security.

Disadvantages of using mortgage:

Interest costs: Over the course of the loan, mortgages usually require interest payments, which
can dramatically raise the total cost of the property. The business will pay more interest the
longer the mortgage term.

Debt Obligation: Taking out a mortgage binds the company to a long-term debt that may reduce
its cash flow and financial flexibility. Foreclosure may occur from nonpayment of the mortgage.

Down Payment: A sizable down payment is typically needed in order to obtain a mortgage.
Money from the company's reserves may be significantly depleted by this first capital
expenditure.
Risk of Property Depreciation: There is a chance that the property's value will not increase as
anticipated, and this could have an impact on the equity and general financial stability of the
company.

Fixed Expenses: Monthly payments for fixed-rate mortgages are predictable, but the business is
locked into those payments, which can be detrimental if interest rates fall and refinancing is the
only way to take advantage of the lower rates.

Maintenance and Expenses of Real Estate: Owning real estate entails continuing expenditures
for utilities, insurance, repairs, and property taxes. The overall cost of owning a property may
increase as a result of these charges.

Shares:
shares are fractional stakes in a company's earnings and assets, representing units of ownership
in the business. By purchasing shares, investors can gain a portion of the company; their
ownership percentage is based on the total number of shares they own. In addition to being
generally transferable and allowing for purchases and sales on the stock market, shares can
grant owners the right to vote on company issues and dividends, as well as liquidity. Common
and preferred shares are issued by publicly traded companies, and they have different
characteristics. In addition to giving investors the chance to share in a company's success and
possibly profit from changes in share prices and dividend income, shares are essential for
businesses looking to raise capital.

Advantages for businesses using shares as a long term source of finance :

Equity Financing: Since shares are an equity investment in the company, the money raised by
issuing shares does not entail taking on debt. For companies trying to escape interest payments
and the related financial commitments of debt financing, this can be extremely helpful.

Permanent Capital: Equity capital raised through share sales is regarded as permanent capital, in
contrast to loans or bonds that have maturity dates and must be repaid. Because there is no
requirement to pay back the capital to shareholders, there is flexibility and stability in the
finances.

No Fixed Payments: Businesses find it easier to reinvest their earnings or use them for other
purposes because shareholders do not expect fixed interest payments. When earnings are
inconsistent or there is financial volatility, this can be especially helpful.

Ownership Control: Companies can raise money by selling shares without giving up control.
Although they can vote on significant issues, shareholders are not involved in the day-to-day
management of the company.

Possibility of Capital Appreciation: By increasing in value over time, shares offer investors the
chance to profit from capital appreciation and draw in new investors to the company.
Disadvantages for businesses using shares as a long term source of finance :
Dilution of Ownership: The ownership stake of current shareholders, such as the founders or
initial investors, may be diluted by the issuance of new shares in order to raise capital. This
implies that the current shareholders will own a lower portion of the business.

Profit Sharing: shareholders are entitled to a portion of the company's profits. The potential
obligation to distribute profits to a greater number of shareholders increases with the number
of shares issued, potentially lowering retained earnings for reinvestment by the company.

Loss of Control: Although shareholders may not be in charge of the company's operations, they
frequently have voting rights that affect board composition and strategic choices. The direction
of the company may be influenced by a sizable number of shareholders.

Debenture:
A company or government body may issue debentures as a sort of bond or obligation to raise
money. An organization effectively borrows money from investors when it issues a debenture,
promising to repay the money plus interest at a predetermined later date. Generally speaking,
debentures are not secured by any particular assets or collateral, making them unsecured.
Rather, they depend on the issuing entity's overall creditworthiness and stability. In the event of
default, holders of debentures are regarded as creditors of the company and may legally seize
its assets. Debentures can have different interest rates, maturity dates, and other conditions.
Businesses frequently use debentures to raise long-term capital for a variety of uses, including
expansion or funding projects

Advantages for businesses using debenture as a long term of finance

No Ownership Dilution: Debentures do not reduce the ownership stake of current owners or
shareholders, in contrast to the issuance of additional shares. This indicates that the current
owners of the company continue to control the business and maintain the company's current
equity structure.

Interest Tax Deductibility: The interest paid on debentures is tax deductible in many
jurisdictions, which lowers the company's overall tax liability and makes borrowing money more
tax-efficient than using other financing options.

Predictable Interest Payments: Businesses can more easily plan their cash flow and budget for
interest payments because debentures typically have fixed or predictable interest rates and
repayment schedules.

No Loss of Control: The issuance of debentures does not confer any voting rights or managerial
or decision-making authority upon debenture holders. The business is able to keep total
operational control as a result.
Use of Funds: There are many different uses for the money raised through debentures,
including working capital requirements, capital investments, research and development, and
expansion financing.

Disadvantages for businesses using debenture as a long term of finance

Interest Payments: Periodic interest payments are necessary for debentures. Penalties, harm to
the company's credit rating, and default are possible outcomes of not making these payments
on time.

Risk of Insolvency: Debenture holders have a legal claim to the company's assets as creditors in
the event that the company experiences financial difficulties or declares bankruptcy. This
implies that if there aren't enough assets to pay off the debt, they might not be able to get their
investment back.

Higher Interest Rates: Debenture interest rates may be higher than those of other financing
options, particularly if the issuing company has a lower credit rating, depending on its credit
rating and perceived risk.

Fixed Obligations: Regardless of its financial performance, the company is required to pay
interest on debentures according to the prearranged schedule. Cash flow may be strained by
this fixed obligation during lean financial times.

Market Conditions: The appeal of debentures may change in response to shifts in interest rates
or other aspects of the market. The cost of financing could go up if new debentures have to be
issued at higher rates due to an increase in market interest rates.

Section – 3 External sources of finance medium term

Financial tools or funding options that businesses acquire for a period of time that usually
ranges from two to five years in order to meet intermediate financial needs and projects are
referred to as medium-term sources of finance. These sources offer a balance between short-
term flexibility and long-term commitments. They include bank loans, leasing agreements,
certain kinds of debentures or bonds with intermediate time frames, They provide businesses
with the money they need for projects that fall between short- and long-term financial needs.
They can be used to finance equipment purchases, support medium-sized projects, manage
working capital needs, or facilitate operational expansions.

Leasing:
In a lease, an asset (such as machinery, vehicles, equipment, or property) is owned by one party
(the lessor) and is made available to another (the lessee) for a predetermined amount of time in
exchange for regular payments. The lessee is granted the right to use the asset, but the lessor
still owns it. The terms, duration, rental payments, and any other particular conditions
governing the use of the asset are usually specified in leasing contracts.

Advantages of business using leasing:

Capital Preservation: Leasing enables companies to obtain essential assets without having to
make a sizable upfront capital expenditure. Businesses can use leasing to save money on other
operational needs or investments rather than buying the asset outright.

Better Cash Flow: Fixed monthly payments found in lease agreements make cash flow
management and budgeting easier to predict than with variable financing or large one-time
purchases.

Access to Modern Equipment: Leasing relieves companies of the financial burden of owning the
newest machinery or technology. By doing this, they are able to maintain their competitiveness
and make use of cutting-edge resources that would otherwise be costly to buy outright.

Adaptability and Flexibility: Leasing provides the ability to adjust to evolving business
requirements. Depending on their needs, businesses can choose to negotiate a purchase,
upgrade to a new model, extend the lease, or return the asset at the end of the lease term.

No Risk of Asset Depreciation: Businesses are shielded from the risk of asset obsolescence or
depreciation because the lessor maintains ownership of the asset. By doing this, the lessor
assumes the risk of ownership.

Decreased Maintenance Costs: Some lease agreements relieve the lessee of extra expenses and
obligations related to upkeep and repairs by providing maintenance services for the leased
asset.

Disadvantages of business using leasing:

Higher Total Cost: Compared to buying an asset outright, leasing an asset may have longer-term
total costs. This is so that businesses do not acquire ownership of the asset; instead, they pay
for its use, including interest and fees.

No Ownership or Equity Buildup: Neither the ownership equity nor the asset buildup are
impacted by lease payments. When a lease expires, the asset is no longer owned by the
business, which can be a drawback because ownership turns the asset into a business asset.

Lease agreements typically entail fixed payments for the duration of the lease. Lease payments
may still be required of the company even if the asset becomes obsolete or is no longer needed.

Conditions and Restrictions: Lease agreements frequently include precise terms, conditions, and
limitations pertaining to the use, upkeep, and adjustments made to the leased property. There
may be fines or further charges for breaking these terms.
No Appreciation Benefits: Lessees are not entitled to any potential increase in the value of the
leased asset, in contrast to owners who profit from any appreciation in the asset's value.

Hire purchase
Through a financial agreement with the owner, also referred to as the vendor or seller, an
individual or business, known as the hirer, can purchase and utilize an asset, such as machinery,
equipment, vehicles, or appliances. A hire purchase agreement requires the hirer to pay a
deposit up front and then regular installments over a predetermined length of time, usually a
few months or years. The asset is possessed and used by the hirer during this time, but they do
not become the owner of the asset completely until the last installment, which includes the
option to buy the asset for a small amount known as the "option to purchase price" or "balloon
payment." Ownership of the asset passes from the vendor to the hirer upon receipt of the last
payment.

Advantages for business using hire purchase :

Access to Assets Without Exorbitant Upfront Costs: Hire purchase enables people or
organizations to purchase assets without having to pay a sizable amount up front. Alternatively,
they can save money for other operational requirements or investments by paying a deposit
and then regular installments.

Instant Possession and Use of the Asset: The hirer receives immediate possession and use of the
asset upon payment of the initial deposit, which enables them to profit from its use while
making ongoing payments.

Preservation of Credit Lines: Hire purchase normally has no effect on an organization's current
credit lines or borrowing capabilities, allowing businesses to retain their financial flexibility. This
is in contrast to other financing options that might require borrowing money or using credit
lines.

Fixed Payments: Compared to variable financing arrangements, hire purchase agreements

frequently have fixed monthly payments, which improve cash flow management and budgeting.

Ownership at the End of the Term: The hirer becomes the owner of the asset upon fulfillment of
the payment schedule. Businesses wishing to purchase the asset outright or individuals
planning long-term use may benefit from this.

Disadvantages for business using hire purchase :

Greater Total Cost: Compared to outright purchases, the total cost of obtaining the asset
through hire purchase may be greater. This is because the asset will ultimately cost more money
due to interest and other fees that are included in the installment payments.
Ownership Delay: The hirer does not fully own the asset until the last payment is received. This
postpones ownership and limits the asset's sale or modification until the entire amount owed is
received.

Risk of Repossession: The vendor has the right to reclaim the asset from the hirer in the event
that they fail to make payments, which could cause the hirer to suffer a loss of funds.

Interest Charges: Compared to other financing options, hire purchase agreements may have
higher interest rates, particularly if the hirer has a less favorable credit profile.

No Ownership During Payment Period: The hirer is not legally the owner of the asset until the
last payment is received. The hirer's ability to sell the asset if necessary or use it as collateral is
restricted by this lack of ownership.

Bank loan:
A bank loan is a type of financial arrangement in which a person, company, or organization
receives a loan from a financial institution, usually a bank. In a bank loan arrangement, the
borrower gets a fixed amount of money, called the principal, and commits to paying it back over
time, typically with interest, in accordance with a prearranged timeline. Bank loans can be used
for a number of things, including paying for projects, buying assets, funding operations for
businesses, covering expenses, and meeting personal needs like buying a car or house. These
loans come in two varieties: secured loans, which need assets or real estate as collateral, and
unsecured loans, which don't require collateral but frequently have higher interest rates
because the lender is taking on more risk. terms of loans from banks, A loan agreement details
all of the terms, which are negotiated between the borrower and the lending institution and
include interest rates, repayment plans, and loan amounts.

advantages to businesses of using a bank loan as a medium-term source of finance:

Access to Capital: Bank loans offer quick access to capital, enabling companies to raise money
for a range of needs, including project financing, working capital requirements, equipment
purchases, and expansion.

Flexible Repayment Terms: Banks frequently provide flexible repayment options, which let
companies adjust the loan terms to better fit their cash flow and financial capacity. These
options include deciding on the loan duration and frequency of payments.

Fixed Interest Rates: Medium-term bank loans frequently have fixed interest rates, which
protect the company from interest rate fluctuations and offer monthly payment predictability.
This makes financial planning and budgeting easier to handle.
Preservation of Ownership: Bank loans do not necessitate giving up ownership interests in the
company, in contrast to the dilution that comes with issuing shares. Companies keep total
ownership and management of their business.

Building Credit History: Repaying bank loans on time can enhance a company's creditworthiness
and create a favorable credit history, which will make it simpler to get financing on favorable
terms in the future.

disadvantages to businesses of using a bank loan as a medium-term source of finance.

costs: The total cost of borrowing is increased by interest charges associated with bank loans. These
expenses can add significantly to the overall repayment amount, contingent on the current interest
rates.

Impact on Cash Flow: Repayment of loans on a regular basis can put a burden on a company's cash flow,
particularly in hard times or recessions. This can make it more difficult for the company to pay other
debts or make investments in expansion plans.

Requirements for Collateral: To secure a bank loan, particularly one of greater size, collateral such as real
estate or other assets may be needed. This is risky because not making the repayment could result in the
loss of the priceless assets that were pledged as security.

Prepayment Penalties: Certain loan agreements have penalties for partial or early repayment before the
prearranged term, which makes it more difficult to pay off debt early.

Effect on Credit Rating: A company's credit rating may suffer if it defaults on or makes late repayments
on bank loans. This could make it more difficult for the company to get financing in the future or result in
higher interest rates for loans taken out later.

peer to peer lending.

Without using traditional banks, people can borrow and lend money directly to one another
through peer-to-peer lending. Loan requests are made by borrowers, and some of these
requests are funded by specific lenders. Peer to peer platforms make this process easier by
bringing together lenders and borrowers. They frequently provide better rates for lenders and
possibly greater returns for borrowers. However, it lacks the safeguards of traditional banking
and is subject to risks like defaults.

advantages to businesses of using peer to peer lending as a medium-term source of finance.

Access to Funding: Due to strict criteria or concerns about creditworthiness, P2P lending
platforms offer businesses an alternative source of funding in case they have trouble obtaining
loans from traditional financial institutions. This provides a wider range of businesses with
access to financing.
Speed and Convenience: Compared to traditional banks, P2P lending frequently has a more
expedited application and approval process, which leads to faster fund access. This can be
especially helpful for companies that require quick funding to take advantage of opportunities
that close quickly or to meet urgent financial needs.

Competitive Interest Rates: P2P lending platforms, particularly for companies with excellent
credit histories, may provide interest rates that are more favorable than those of traditional
bank loans. A more appealing financing choice is one that has lower interest rates since they can
lower the total cost of borrowing.

Flexible Loan Terms: P2P lending platforms frequently provide flexible loan terms, enabling
companies to bargain over parameters like loan amounts, repayment schedules, and durations
in accordance with their unique financial requirements and repayment capabilities.

No Collateral Needed: A few peer-to-peer lending platforms provide loans without the
requirement for collateral. For companies that might not have many valuable assets to pledge
as security for conventional bank loans, this can be advantageous.

disadvantages to businesses of using peer to peer lending as a medium-term source of finance.

Interest Rates and Fees: Compared to traditional bank loans, P2P lending platforms may have
higher interest rates or fees, particularly for companies with less favorable credit histories. This
could make borrowing more expensive overall.

Limited Borrowing Amounts: The maximum amounts that businesses can borrow from P2P
lending platforms may be restricted. Larger companies that need a lot of funding may find this
restriction to be insufficient.

Creditworthiness Requirements: P2P lending platforms do require a certain level of

creditworthiness, even though they may provide financing options to businesses with lower
credit ratings. Companies with bad credit histories may have trouble getting loans or pay higher
interest rates.

venture capital.

Venture capital is a type of private equity funding that is given to small businesses, startups, or
early-stage companies that have creative ideas and strong growth potential. Funding is provided
by investors or venture capital firms in return for an ownership or equity stake in the business.
Usually, these investments are made in companies that offer both a high risk and a significant
return potential. Venture capitalists frequently take an active part in the businesses they invest
in, offering knowledge, coaching, and strategic direction to ensure the companies' expansion
and success.

Explain the advantages to businesses of using venture capital as a medium-term source of finance.
Access to Significant Funding: Venture capital offers access to significant sums of money that
might be difficult to come by from other sources or traditional lenders. For startups and high-
growth companies with game-changing ideas or disruptive technologies, this funding is
especially important.

Beyond monetary contributions, venture capitalists frequently provide valuable networks,

industry knowledge, and strategic advice. They support the expansion and success of the
business by offering mentorship, counsel on business tactics, and connections to possible
partners, clients, or investors.

Credibility and Validation: Obtaining venture capital funding can help a business idea or concept
gain credibility. It can improve the business's reputation and appeal to other possible backers,
clients, or business associates, strengthening its position in the market.

No Collateral Requirements: Venture capital funding usually does not require specific assets as
security, lowering the risk of asset loss in the event of business failure. This is in contrast to
traditional loans, which may require collateral.

disadvantages to businesses of using venture capital as a medium-term source of finance.

loss of control: In return for funding, venture capitalists frequently take on a sizeable ownership share in
the business. The original owners or founders may lose control and authority to make decisions as a
result of this.

Strategic Disparities: Conflicts may arise from different perspectives or directions taken by the venture
capitalists and the founders/management. Divergent viewpoints among venture capitalists may exist
regarding the objectives, exit timing, and company strategy.

Pressure for Quick Growth: High returns on investment and quick growth are what venture capitalists
usually anticipate. This could put pressure on the company to put short-term growth ahead of
sustainability or profitability in the long run.

High Cost of Capital: Funding from venture capital firms is frequently associated with high costs,
such as giving up a sizeable percentage of equity and possible future returns. If this is the case,
the overall cost of capital might be higher than with traditional loans.

ection 2 – External sources of finance – Short-term

short-term source of finance.

When a business uses temporary or immediate funding options to cover its short-term needs,
typically for a period of time ranging from a few days to a year, it's referred to as a short-term
source of finance. Usually, these funding sources are used to pay for operations, control the
amount of working capital needed, or satisfy urgent financial obligations. Businesses can use
short-term financing to close cash flow gaps, manage daily operations, capitalize on seasonal
fluctuations, preserve liquidity, and grab fleeting opportunities. Trade credit, bank overdrafts,
short-term loans, commercial paper, invoice financing, and credit lines are typical instances of
short-term sources of funding. These financing options allow businesses to meet their current
obligations without delay because they are used to address immediate financial needs and are
typically repaid within a short period of time.

bank overdraft.
An overdraft is a short-term credit arrangement that banks offer to their clients, enabling them
to take out or spend more money than they have available in their account. When an account
balance hits zero or goes negative, it allows account holders to overdraw their funds up to a
predefined limit, effectively borrowing from the bank. Usually, the overdraft limit is
predetermined based on the account holder's creditworthiness and banking history. Both
individuals and businesses frequently use bank overdrafts to handle short-term cash flow needs,
cover unforeseen expenses.

advantages to businesses of using a bank overdraft as a short-term source of finance.

Flexible Access to Funds: Bank overdrafts give companies quick access to extra cash when their
cash flow is momentarily inadequate, enabling them to meet unforeseen costs or short-term
demands.

Interest Only on Amount Used: Since interest is normally only assessed on the amount
overdrawn, businesses can reduce their interest expenses by only using the overdraft facility
when absolutely necessary and for the whole amount of time that is required.

Fast and Convenient: Businesses with established banking relationships can easily access
overdraft facilities, which provide a quick and easy way to handle urgent financial needs without
requiring a drawn-out approval process.

merger backup: Overdraft accounts act as a safety net for unforeseen costs or crises, giving
companies access to money in case of unanticipated events.

No Collateral Requirement: Since overdrafts are frequently unsecured, companies can access
the facility without having to pledge any specific assets or collateral, which lowers the possibility
of asset seizure in the event of non-repayment.

disadvantages to businesses of using a bank overdraft as a short-term source of finance.

Interest costs: Overdrafts are a relatively expensive source of short-term financing because they usually
have higher interest rates than other financing options. An ongoing dependency on overdrafts may result
in higher interest costs.

Fees and Charges: In relation to the overdraft facility, banks have the right to levy fees or charges. These
may include usage fees, service fees, or penalties for going over the predetermined overdraft limit. The
total cost of using the facility may increase as a result of these extra charges.
Risk of Withdrawal or Reduction: If banks believe a business poses a greater risk, they have the right to
withdraw or lower the overdraft facility at any time. The abrupt withdrawal may cause financial strain
and disturb the company's cash flow.

unpredictability: The terms, interest rates, and withdrawal of the overdraft facility are subject to change
by the bank without prior notice, which creates uncertainty for businesses regarding their cash flow
management and financial planning.

crowdfunding.

Using the combined power of the crowd, crowdfunding is a modern financing technique that helps
support ideas, projects, and initiatives. It entails asking a large number of people for financial support,
frequently via specialized online platforms or websites. Contributors give small amounts of money,
investments, or donations to support a specific cause, business venture, artistic project, or individual
initiative. Instead of depending on traditional financial institutions or a select group of investors, this
method democratizes fundraising by enabling creators, entrepreneurs, artists, non-profits, and startups
to access capital directly from a diverse community of backers. Campaigns for crowdfunding can take
many different forms, such as providing products or rewards to backers, asking for donations without
any expectation of rewards, exchanging investments for equity, or offering loans with repayment terms.

advantages to businesses of using crowdfunding as a short-term source of finance.

Access to Capital: Through crowdfunding, companies can obtain funds from a sizable number of
supporters, possibly reaching a worldwide investor or contributor base. This offers a different
kind of funding source from conventional lenders or investors.

Various Models: Crowdfunding provides a range of models (donation-, reward-, equity-, or

lending-based) to suit a variety of industry and business needs. Companies are free to select the
crowdsourcing model that best suits their goals and potential backers' preferences.

Market Validation: A business idea, good, or service can get market validation through
successful crowdfunding campaigns. Positive feedback and validation prior to product launch or
investment is provided by backers, indicating demand and interest.

Marketing and Exposure: Crowdfunding campaigns work well as promotional instruments,

generating interest in and publicity for the company, item, or undertaking. Interacting with a
backer community can create awareness, draw in new clients, and cultivate a devoted clientele.

Explain the disadvantages to businesses of using crowdfunding as a short-term source of finance

campaign Costs and Efforts: It takes a lot of time and money to manage a crowdfunding
campaign. Developing a strong campaign, producing marketing collateral, keeping in touch with
supporters, and advertising the campaign through a variety of media all demand commitment,
time, and frequently money.
No Promise of Success: Not every crowdsourcing project raises the necessary funds. A campaign
runs the risk of not drawing in enough supporters or missing its funding goal, which would make
it impossible to get the money it needs.

Platform Fees and Charges: Crowdfunding platforms frequently impose fees for running
transactions or campaigns, which lowers the total amount of money that the company raises.
The net amount available for the intended purpose may be impacted by these fees, which can
vary.

Crowdfunding platforms foster a highly competitive environment by hosting multiple campaigns

at the same time. It can be difficult to stand out from the hundreds of other campaigns
competing for backers' attention.

debt factoring.

Through debt factoring, a company sells its outstanding bills (accounts receivable) to a third party at a
reduced price, known as a factor. With this arrangement, the business receives instant cash flow from
the factor, which is usually between 70 and 90 percent of the invoice value. After that, the factor takes
over responsibility for getting customers to pay in full. After the clients pay their bills, the factor takes its
cut and sends the remaining money to the company. Though at the cost of a discount on the entire
invoice value, debt factoring helps businesses manage cash flow, meet immediate financial obligations,
and avoid delays associated with waiting for customers to pay.

advantages to businesses of using det factoring as a short-term source of finance.

Better Cash Flow: By turning accounts receivable into liquid funds, debt factoring gives businesses
instant access to cash so they can pay suppliers, cover operating costs, invest in growth initiatives, and
handle urgent financial needs without having to wait for payments from customers.

Improved Working Capital: By quickening the cash cycle, factoring enables companies to keep a sufficient
amount of working capital on hand. This liquidity reduces the possibility of cash flow shortages, enables
more efficient operations, and guarantees on-time supplier payments.

Risk Mitigation: By giving the factor control over payment collection, the business lowers its exposure to
bad debts and defaults. Factors frequently evaluate the customers' creditworthiness, reducing the
possibility of nonpayment.

disadvantages to businesses of using debt factoring as a short-term source of finance.

Costs and Fees: Factoring firms bill for their services using a variety of methods, such as service fees,
administrative fees, or discount fees based on the invoice value. These expenses may be more than
those associated with conventional financing sources, which could affect the company's overall
profitability.
Discounted Value: When invoices are sold at a discount, a portion of the invoice value is received.
Although the factor applies a discount, the business receives less overall even though it offers instant
cash.

Potential Customer Perception: A third party's involvement in invoice collections may be perceived
negatively by customers, harming the company's relationship. Some clients might feel more comfortable
interacting with the company they bought from directly than through a middleman.

invoice discounting.

Using invoice discounting, a company can obtain quick funding from a financial institution by
using its outstanding invoices as collateral. In contrast to debt factoring, the company is still in
charge of collecting invoices. It gives invoices as collateral to the lender, who lends it money
based on the invoice value (typically 70–90%). The company is still in charge of handling client
payments. The company repays the loan plus any associated costs or interest after customers
pay the invoices. Through the quick access to working capital that this method provides,
businesses can manage cash flow and meet immediate financial needs without involving
customers directly or disclosing the financing arrangement.

advantages to businesses of using invoice discounting as a short-term source of finance

Better Cash Flow: By using unpaid invoices as leverage, invoice discounting gives businesses
quick access to cash by releasing working capital that is locked up in outstanding invoices, which
they can then use for urgent needs.

Maintained Control over Collections: Invoice discounting gives companies the ability to keep
control over their customer relations and invoice management, in contrast to debt factoring,
which assigns the factor's responsibility for collections. Companies still obtain payments directly
from clients.

Financed in Confidentiality: Discounting invoices is kept hidden from clients. Companies can
obtain funding without telling their clients about the financing arrangement, protecting their
reputation and relationship.

disadvantages to businesses of using invoice discounting as a short-term source of finance.

Interest costs are incurred by the financing company on the money advanced against the
invoices. When compared to other financing options, this interest expense may be greater,
which raises the total cost of borrowing.

Hidden Fees and Costs: Invoice discounting may come with extra costs in addition to interest,
such as facility, administrative, or service fees. These charges may add up and have an effect on
the financing's actual cost.
Effect on Earnings Margin The total invoice value is decreased by the lender's interest or
discount. The discounted value has an impact on the sales profit margin even though it offers
instant cash flow.

trade credit

Trade credit is an agreement between businesses whereby one permits another to purchase
goods or services on credit. Under this arrangement, the buyer accepts delivery of the goods or
services right away and promises to pay for them later, usually within a predetermined window
of time. This type of short-term financing is frequently provided in business-to-business (B2B)
transactions by vendors or suppliers to their clients. Trade credit conditions differ and
frequently include a set amount of time for payment, like 30, 60, or 90 days from the date of
purchase or delivery of the goods. By obtaining necessary goods or services without immediate
payment, this arrangement helps the purchasing business manage its cash flow, supporting
operational continuity and possibly increasing liquidity.

advantages to businesses of using trade credit as a short-term source of finance.

Immediate Access to Goods and Services: Trade credit enables companies to quickly obtain the
goods and services they require without having to make upfront cash payments. Because cash
flow is limited, this allows operations or production processes to continue without interfering
with workflow.

Better Cash Flow: Businesses can save money by postponing supplier payments and utilizing it
for other operational expenses or investment opportunities. Enhancing cash flow can be
essential for controlling ongoing costs and grabbing expansion chances.

Enhanced Working Capital: By extending the period between purchase and payment, companies
can better manage their cash flow cycles and maximize working capital by obtaining goods or
services on credit.

disadvantages to businesses of using trade credit as a short-term source of finance.

Potential Cost of Goods: Compared to cash sales, suppliers may charge more for goods or
services that are supplied on credit. The advantages of the credit arrangement may be
outweighed by this cost increase.

Dependency on Suppliers: A heavy reliance on trade credit may lead to a dependence on

particular suppliers. The supply chain and operations of the company may be affected if these
suppliers have problems or alter their terms.

Diminished Negotiating Power: Companies that mainly rely on trade credit may find that their
negotiating power with suppliers is restricted. If the company regularly uses credit for
purchases, suppliers might be less likely to give discounts or good terms.
A1 – Section 3 – Net current assets

net current assets.

The difference between a company's current liabilities (such as accounts payable and short-term
debt) and current assets (such as cash, accounts receivable, and inventory) is known as net
current assets, or working capital. This financial indicator shows how well a business can use its
short-term assets to pay off its short-term debts. A positive result means that the company has
more current assets than current liabilities, indicating that it has enough cash on hand to meet
its immediate obligations. On the other hand, a negative value indicates that a business might
find it difficult to pay down its short-term debt with its current short-term assets.

The formula to calculate net current assets is:

Net Current Assets = Current Assets − Current Liabilities

importance of net current assets to a business.

Because they show a company's short-term financial health by being the difference between its
current assets and liabilities, net current assets, also known as working capital, are extremely
important to businesses. This measure is essential for assessing liquidity since it guarantees that
the company can pay its debts immediately and doesn't need outside capital. Sufficient working
capital makes operations more efficient, enabling seamless daily operations, prompt supplier
payments, and the ability to seize expansion opportunities. Sustaining a healthy level of net
current assets is essential for business stability and success because it boosts a company's
credibility, supports resilience against economic fluctuations, and offers the flexibility required
for sustained growth.