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Sources of finance

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Introduction

The recent financial crisis was a combination of bad financial risk management by the banks and poor government intervention on activities such as bank mortgages. This resulted in a global recession and the collapse of the financial and housing market. There have been recent signs of recovery from the recession such as the announcement by the BBC of 0.3% economic growth in the UK (BBC online, 2010). However, the banking sector feels small British firms are still at risk of being hit by the economic downturn in 2010. The aim of this essay is to discuss the further consequences small businesses face as a result of the economic downturn in 2010, the possible changes a small firm could make to their working capital in preparation for a period of falling demand. In addition, the advantages and disadvantages of reducing stocks in times of economic downturn. A recession is defined as 'a downturn in sales and production that occurs across most parts of the economy perhaps leading to six months of continuous economic decline' (I.Marcous´┐Ż, 2008). In summary, the recent economic downturn was to an extent, caused by the collapse of the US housing and global financial market. Previous to the recession banks loaned money to individuals and businesses who were interested in purchasing property in the belief that value of the property will rise and in some reported cases lent more money than requested. ...read more.

Middle

Therefore small firms will have to consider alternative sources of finance. Trade credit is a possible alternative source of finance for a small firm. Defined as 'when suppliers agree to accept cash payment at a given date in the future' (I.Marcous´┐Ż, 2008).This is possibly the cheapest finance option available as it cost the business nothing to arrange such an agreement. Trade credit will allow the firm spend their already declining capital on other aspects of the business operation in order to accommodate for the falling demand. For example a local restaurant will be able to pay their electrical and water bill allowing them to continue operation. However, during a period of falling demand the future of a small firm may not be certain an as a result there is a risk the firm will not be able to pay suppliers when the time comes and this could damage the relationship between the firm and supplier and mitigate chances of attaining trade credit in the future. In addition, the chances of obtaining trade credit will be low considering the possibility that falling demand will also affect competitors and as a result they may also try to attain trade credit thereby creating heavy competition. A small firm may consider debt factoring as an alternative source of finance. Debt factoring is when 'A business sells its outstanding customer accounts (those who have not paid their debts to the business) ...read more.

Conclusion

It can be argued; depending on your business reducing stock will be beneficial for a small firm as it reduces cost in terms of storage space and security, also allows the firm to accommodate for the falling demand resulting from the economic downturn. However, from my perspective debt factoring will be the best course of action for a small business during a time of falling demand. In an economic downturn there is likely to be high unemployment and as a result falling demand thus reducing the circulation flow of income. Consumers will have less cash available and this means there is a greater chance of individuals not paying their debts on time or even defaulting. For this reason, assuming the firm has debtors, firms which require a short term form of finance will want to consider debt factoring. Seeing as it is likely debtors will not pay on time or at all it will be greatly beneficial for the firm to sell off their debts. Although a firm are selling at a loss and may face difficulty selling the debts in an economic downturn as debt factoring company will also be aware of problems facing debtors, if possible it will provide the small firm the capital they need to finance their operation, thereby giving the firm a better chance of surviving the economic downturn. In addition, survival should be the likely objective for any small firm in such a period. ?? ?? ?? ?? ...read more.

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