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Business Finance
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Business Finance
• When choosing a source of finance, there are three
terms:
 Short term – Up to one year
 Medium term – Between one and five years
 Long term – Over five years
• When deciding which term to choose, the business
should consider carefully:
 What they need the money for
 How much they have available to meet the
repayments
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Business Finance
• The main sources of finance available to business
are:
1. Short Term Finance
 Trade Creditors
 Bank Overdraft
 Expenses Due
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Business Finance
• The main sources of finance available to business
(continued):
2. Medium Term Finance
 Term Loan
 Leasing
 Hire Purchase
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Business Finance
• The main sources of finance available to business
(continued):
3. Long Term Finance
 Ordinary Shares
 Retained Earnings
 Sale and Leaseback
 Long Term Loans
 Government and EU Grants
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Business Finance
Short-term sources of finance
1. Trade Creditors
 Here payment to creditors is delayed and the money
placed on deposit earning interest
 No interest is charged
 Firm may lose out on cash discounts available for
early payment
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Business Finance
Short-term sources of finance (continued)
2. Bank Overdraft
 The current account customer gets permission to
overdraw their current account
 Interest is only charged on the amount of the
overdraft used
 Overdraft interest is higher than other bank loans
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Business Finance
Short-term sources of finance (continued)
3. Expenses Due
 Here payment for business expenses is delayed and
the money placed on deposit earning interest
 No interest is charged
 Firm may risk losing essential services if they do not
pay their bills on time
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Business Finance
Medium-term sources of finance
1. Term Loan
 A loan which is repaid over a fixed period of time
between one and five years
 Both loan and interest are repaid in equal
instalments
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Business Finance
Medium-term sources of finance (continued)
2. Leasing
 A firm agrees with a financial institution to pay an
agreed sum of money each month in eturn for the
use of an asset
 The firm never owns the asset
 The firm may end up paying more in the long term
than the asset is worth
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Business Finance
Medium-term sources of finance (continued)
3. Hire Purchase
 The hire purchase agreement involves three parties –
the buyer, the seller and the finance company
 The finance company pays the seller in full for the
asset and then collects the money in instalments
from the buyer over an agreed period of time.
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Business Finance
Long-term sources of finance
1. Equity Capital (Issue of Ordinary Shares)
 The company sells shares in the business to raise
money
 Dividends may be paid to the shareholders out of the
profits each year
 No interest has to be paid on the money raised
 Each new shareholder has a say in the running of the
company
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Business Finance
Long-term sources of finance (continued)
2. Retained Earnings
 Here, some of the profits made are retained (kept)
in the business to pay for future expansion
 There is no cost to this type of finance
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Business Finance
Long-term sources of finance (continued)
3. Sale and Leaseback
 Here fixed assets are sold to raise finance for the
firm and then leased back over a long period of time
 The firm gets keeps full use of the asset and also
receives a much needed cash injection
 The firm no longer owns the asset and so will not
benefit from any increase in value
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Business Finance
Long-term sources of finance (continued)
4. Loan Term Loan
 The loan and interest is paid back in equal
instalments over the length of the loan
5. Grants
 A non-repayable source of finance from the
Government or European Union
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Business Finance
Long-term sources of finance (continued)
 Examples of grants include:

Enterprise Ireland providing grants to new firm’s
starting up

Failte Eireann providing grants to firms in the Tourism
sector
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Business Finance - ST.DOMINICS COLLEGE