JUNIOR CYCLE BUSINESS STUDIES It is important that a business chooses the correct source of finance for its needs.
Short-term sources are for short-term needs. Medium-term sources are for medium-term needs and long-term sources are for long-term needs.
SHORT-TERM SOURCES OF FINANCE Short-term sources of finance are due to be repaid within one year.
Bank Overdraft
This is permission from the bank for the business to withdraw more money from its current account than is in the account. The business can withdraw up to an agreed limit.
The bank will charge interest on the amount overdrawn. The interest on bank overdrafts is higher than on other types of loans.
Trade Creditors
A business may be able to buy supplies on credit and pay for them at an agreed later date (e.g. in 30 days). In the meantime, it can use the money to pay for other expenses or earn interest on the money in savings.
By waiting to pay for supplies, the business will lose out on any discounts offered for early payment.
Expenses Due
Some expenses, such as electricity or a tax bill, do not have to be paid immediately and the money can be used in the meantime to finance the business. This money can also be placed in a bank account to earn interest.
It is important that the business has the money available when the bill needs to be paid. For example, electricity may be cut off if the electricity bill is not paid.
MEDIUM-TERM SOURCES OF FINANCE Medium-term sources of finance are due to be repaid within one to five years.
Term Loan
This is a loan from a financial institution that is taken out over a period of one to five years. The loan is paid back in instalments, plus interest.
The repayments can be tailored to suit the needs of the business. A business can repay on a weekly, fortnightly or monthly basis and can decide how long it wants to take the loan out for (within the one to five years).
