Short-Term Sources of Finance


Short-term finance refers to money used to cover day-to-day running costs. It is repaid within one year.


KEYWORDS


Paying Wages Payslip


Buying Stock Paying Bills


Sources of short-term finance:


Bank overdraft: Allows a business to withdraw or spend more money than it has in its current account, up to an agreed limit. Reason to use it: A business can spend more money than it has without needing to


apply for a loan each time it wants to use it. Drawback: Interest rates are high on the overdrawn amount.


Credit card: Allows a business to pay for goods or services now and settle the balance at the end of the month with their bank. Reason to use it: A business can make purchases straight away without needing the


cash in its account at that moment. Drawback: If the balance is not cleared each month, high interest is charged on the


amount still owed.


Trade credit: An agreement that allows a business to receive goods from a supplier now and pay for them at a later date, typically after 30, 60 or 90 days. Reason to use it: A business can receive stock without paying for it straight away,


giving it time to sell the goods before the bill is due. Drawback: If the business fails to pay within the agreed period, it may lose its credit


terms with the supplier.


Debt factoring: A business sells its unpaid invoices to a finance company at a reduced price, rather than waiting for customers to pay. The finance company then keeps any debts it goes on to collect. Reason to use it: A business gets cash in quickly without having to wait for customers


to pay their bills. Drawback: The business receives less than the full amount owed as the finance


company charges a fee for the service.


244 2


STRAND 2


CHAPTER 24: Sources of finance and the cash flow budget


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