Obtaining (Short and Long term) Finance – GCSE Business Studies Revision

Types of finance:

  • There are two types of finance a business can obtain: Long-term finance and Short-term finance
  • Short-term finance is money that is only invested or borrowed for a year or less
  • Long-term finance is any money that is invested or borrowed for more than a year

Long-term finance can be used to:

  • Get money to start-up the business, or finance it at any point
  • Pay to buy things like buildings and equipment
  • Provide money to expand the business

Types of long-term Finance:

  • Share Capital – gained when people invest in the company, buying shares and taking part-ownership of the business
  • Loans – money borrowed from the bank for an agreed length of time, with something of value as a deposit (e.g. a building which the bank can sell if the business doesn’t pay back the loan by the end of the contracted time)
  • Retained Profit – money made by the company which is put back into the business to buy new things

Short-term finance can be used to:

  • Get through periods when the business isn’t doing well (when cash flow is bad)
  • Look after the business whilst it’s waiting for a customer to pay and no cash is coming in
  • Provide extra money to buy and produce things quickly for a rush order

Types of short-term finance:

  • Bank overdrafts – taking more money out of the bank than is actually available in the bank; this is paid back immediately
  • Trade credit – when goods are
    received immediately but paid for later in an agreement between two businesses
  • Factoring – when a factoring company buys your debts from you to pay them off and allow you to borrow money again, but keeps some of your money
  • (Factoring is confusing)
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