Overdraft – this is the money the business does not have and goes over the bank balance called an overdraft and pays back with a minimum interest rate at the end of the month also with flexibility as when the payment is paid back. If this is not paid at the end of the month then the interest keeps building up but interest is only paid on the money you use. You can also choose whether you need the overdraft for one month or for up to 12 months.
Hire purchase – known as HP it is a common way of paying for items such as cars, furniture, computers etc. You don't legally own the goods until you've paid back all the money you owe. This means that you cannot modify or sell them without the lender's permission. Your contract is with a finance company not the retailer who will own the goods until the final payment is made. The finance company can take the goods back if you don't keep up your repayments. You will be liable for any damage caused to the goods during the contract period. Under an HP agreement, you pay an initial deposit followed by monthly payments (a portion of the money you borrowed plus interest) over an agreed period.
Leasing – is an item (property, equipment etc) that has been rented and a contract is signed for a certain amount of time. You can lease a property from the owner for as long as you like and also other items can also be leased such as photocopier, printers etc. Leasing is signing a contract and agreeing on the terms and conditions of the contract. Most small businesses lease properties so they don’t own the property and if anything goes wrong then they won’t have to loose their property because it is on lease.
The finance listed below is the finance available to private and public companies
Preferences shares – these shares are only given to people the owners want the shares to be given to. The share owners also do not have any right in the votes in the business. Ordinary shares are shares that represent the business ownership, when an individual buys shares in a company they become one of the owners and in a private limited company only. Shareholders choose who runs the company and are involved in making key decisions such as if the business should be sold.
Debentures – this is a long term loan and does not have to be paid off until the agreed date within the contract and also only some companies are available to get this loan as it is restricted due to the loan not being paid back. The monthly interest rate is also fixed.
Venture capitals – mostly commonly referred to as a type of investment in which individual investor or group of investors usually assists in the further expansion of a rapidly growing company or a commercial organisation that will require a lot of capital to get going which is known as a start up company or with a strong business plan. The venture capital is known as risk capital.
Debt factoring – provides a fast repayment for when a business owes someone else money. It allows at a cost to flexibility increase your working capital and improves cash flow. Debt factoring is offered to businesses trading with other businesses on credit terms. It is not normally available to retailers or to cash traders. Most factors make payments within 24 hours and most factors require three months notice to end the service. This is also commonly used by businesses to improve cash flow with fast payments. Credit limits are also required for most businesses. When a business gets trade credit from another business and then pays back in some time such as three months but if the business that has to pay the other business can not afford to pay back then the factor pays almost the full amount and to the business that the money is owed to and then the factor gets their money back from the business that owed the money in the first place. This becomes a three step producer.
Ordinary shares – have votes on the shares within the company meetings and also if the business isn’t doing well then the shareowners get hardly any money back but if the business is doing well then they get a big cut of the money. A share entitling its holder to a dividend, if any, after the payment of the fixed dividend in the respect of preference shares. The source of finance that businesses receive from shares is that they sell the shares and then the shareholders sell the shares on.
Merit
The advantage and disadvantages of each kind of finance
Mortgage
Advantages – there are lots of different advantages for mortgage such as you don’t need to verify your income and can pay a lump some depending on the mortgage type.
Disadvantages – there are more risks on a mortgage than an advantage such as you can loose you house if you don’t stay up with the repayments. There are also high interest rates involved and higher interest rates with loads of competition. Can not pay the mortgage down with most places and also unable to take advantage of lower interest costs if the market changes to lower rates.
Loans
Advantages – can have a fixed interest rate; can be protected if interest rates go up, monthly payments, can also lower down the loan amount, don’t have to verify income depending on the loan,
Disadvantages – can have a large interest rate, can get bankrupt if the loan is not paid back or even loose personal belongings, if payments are missed then will have to pay a charge to the bank and the loan company too, may have to pay a balloon lump sum
Trade credit
Advantages – don’t have to pay the money when you get the stock.
Disadvantages – if you don’t pay the money back for when the supplier wants it then the trading might stop and you will have to pay interest and maybe not get trade credit again.
Overdraft
Advantages – get money when you don’t actually have the money and can purchase the stock or whatever you want to purchase.
Disadvantages – will have to pay a minimum interest charge, if you don’t have the money at the end of the month then you will be charged more interest.
Hire purchase
Advantages – you get the item and pay nothing, pay easy payable monthly instalments.
Disadvantages – very high interest rate, have to pay a balloon sum at the end of the agreement.
Leasing
Advantages – offers fixed rates, pay the same rate each and every month, less upfront cash, you lease and only pay the amount the time you use the item, can in most cases buy the equipment at the end of the lease.
Disadvantages – you never own the product until the full amount is paid,
Capital expenditure
Advantage – you don’t own the items so if they go wrong you don’t have to fix them
Disadvantages – you never own the product
Preference shares
Advantages – you can end up spending a lot on products
Disadvantages – it can be distinguished between the maintenance
Debentures
Advantages – don’t have to be paid back until agreed date
Disadvantages – loan is restricted due to loan not being paid back
Venture capital
Advantages – others invest in the business
Disadvantages – venture capital known as a risk
Debt factoring
Advantages – fast payments against sales ledger
Disadvantages – not normally available to retailers or cash traders
Ordinary shares
Advantages – have votes on the shares within the company.
Disadvantages – the share owners get hardly any money back if the business goes bankrupt
Bibliography
https://www.eloan.com/s/show/prosncons