Long-Term Sources of Finance


Long-term finance refers to money used to fund major investment that will benefit a business for many years (>5 years).


KEYWORDS Expansion New premises


Sources of long-term finance:


Long-term loan: A loan from a bank repaid with interest over more than five years. The business may have to provide collateral as security. Reason to use it: The business can spread the cost of a major purchase over many


years. Drawback: Collateral may be required, where the borrower offers an asset to the


bank as security to be taken if they cannot repay their loan.


Grant: A sum of money given to a business that does not have to be repaid but must be used for a specific purpose. Grants can be accessed from the government, a Local Enterprise Office or the EU.


Reason to use it: The business receives funding without having to pay it back. Drawback: It comes with conditions on how the money must be spent.


Selling Shares: Finance raised by selling ownership of the business to investors. Reason to use it: The business raises money without taking on debt or paying


interest. Drawback: The owners of the business have to give away some control of the


business.


Retained Earnings/Reserves: A business can use the profit it has made in the past that is still in the business. Reason to use it: No interest to pay and no loan application needed. Drawback: It may not be a large amount for start-ups, and it also reduces the cash


available in the business for other purposes.


Sale and Leaseback: A business sells an asset it owns, such as a premises, to a finance company and then leases it back, continuing to use it while making regular payments. Reason to use it: The business releases cash from an asset it already owns without


having to give up the use of it. Drawback: The business no longer owns the asset and must continue to make lease


payments to use it. 246 2


STRAND 2


CHAPTER 24: Sources of finance and the cash flow budget


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