Understand the sources of finance Essay Example | Topics and Well Written Essays - 1000 words

Understand the sources of finance - Essay Example Sources of Finance Name University Body An outline of the various (at least 8) sources of finance that participants may choose from. (AC 1.1 Identification the sources of finance available to a business) Trade credit refers to the purchase of goods and services on the basis of credit; this means that the business can purchase the raw materials from its suppliers on credit basis. Business can even ask for a loan from a particular bank if it wants to finance its operations. The business can even save money by obtaining discounts on purchase of raw material by paying money in cash; various suppliers provide discounts to those businesses that pay their invoices in cash. Bank overdraft refers to the allowance of obtaining higher amount of finance than the depositor has deposited in his/her bank account. Business tend to share its profits among shareholders as dividends after a particular period of time, businesses can use this profit for operational and expansion purposes instead of distributing as dividends. Business can decrease the amount of inventory they hold, this will help them use the money for other purposes and money will not remain tied up in inventory for a longer period of time. Business can delay the payments it has to make to its creditors and suppliers and they can even sell portions of the company to the public and obtain finance for their operations. The legal, dilution of control and bankruptcy implications of the various sources of finance identified (AC 1.2 Assessment the implications of the different sources) There are several advantages and disadvantages associated with the financing sources obtained through external financing sources. The advantages of external financing sources stated in this report are that these finances can be obtained at a very fast pace, the cost of obtaining these finances is quite lower and the amount of interest paid for these sources are even at a very lower end. These sources of finance are quite flexible, the repayment method of these sources of fi nance is even quite easy and terms of financing are simple. These sources of finances are although used for financing short term financial requirements, but they can be obtained for the longer run. For example: the time period of repayment to creditors can be extended. There are even disadvantages associated with the stated external sources of finance, the business has to bare the burden of paying interest even of the business ends up making a loss and has to repay the loan amount (NEEDHAM, 1995, p.99). Another problem with this source of finance is that, in order to obtain a bank loan an organization has to give something to bank as collateral. If the organization fails to repay the loan, the bank sells the collateral in order to retain the amount they have given to the organization as loan. During the periods of recession and economic downtrend, businesses face decline in profits and even experience loss due to which they face issues in obtaining bank loans and suppliers do not tr ust them and do not offered goods and services in credit form to the organization. An analysis of the financial implications (e.g. tangible and opportunity costs), and tax effects of using the various sources of finance that you outlined in AC1.1 and AC1.2 above (AC 2.1 Analyse the costs of different sources of finance) There are severa