Long Term & Short Term Business Finance, Business Economics & Finance Video Lecture | Business Economics & Finance - B Com

this lesson is all about sources of
finance the objective of the lesson for
sources of finance you need to show an
appreciation of the difference between
the need for short and long term finance
secondly you need to identify the
difference between internal and external
sources of finance and last you're going
to be able to explain the main factors
and reasons which effects and the
methods of finance chosen by a
particular business so what are the
different reasons and choices the
business has to make when they choose a
source of finance so what is finance
well it's very much very straightforward
finance is money and a source of finance
is where we get that money from and
we're going to be looking a number of
different sources or different places
where we can get money from throw-ins
lesson today it's a business that need
finance well of course if you want to
start on your business you need money so
you'll need finance maybe if you're
going to move into a new building
because maybe your current buildings too
small you may need more money maybe for
example if you want to take over another
business you may need money if your
machines break down you'd obviously need
to replace that which costs money and if
for example internal growth so for
example if you're going to employ more
staff you'll need more money to pay them
so we've looked on my past personal
people need money personally but also we
looked at how businesses need money as
well or finance so we've got two main
sort of two main types of finance sorry
you've got internal finance and external
finance internal violence is money that
we came from within the business and
external finance is where we look
outside the business to get money so
we've talked about internal external
source to finance internal finance is
finance or money obtained from within
the business and examples could be
retained profit so if you but if you if
the cost of something is ten pounds and
you sell it for fifteen pounds you've
made profit which is five pounds you can
use that profit within the business so
that's money from you that you've gained
from within the business cash in the
bank if you've got any money saved up in
the bank from the business you can use
that as an internal source of finance
the owner of the business may have his
own money which he invests into
the business again it's an internal
source of Finance and the sale of assets
or things that you own so if you've got
um if you own a pizza shop and you sell
your oven for example you might set up a
ten grand that's money you gained from
within the business and that's a source
of Finance so these four sources of
finance are all from within the business
so internal sources of finance so we're
going to look at so we looked at
internal sources of finance and we're
going to look at short and long term
sources of finance so when you look at
internal sources of finance we've got a
short term finance which would last us
for about up to 12 months and the best
example here is cash in the bank cash in
the bank is a short term source of
Finance which is internal we've got
medium-term finance which is normally
useful between one and three years and
retain profit or the sale of an asset
would probably be most realistic to use
as a medium-term
internal source of violence and lastly
long term finance which is finance
that's going to be used long term for
three or more years and the owners
investment would probably the most
likely long term internal source of
Finance so you can see looked at short
medium and long term violence and that's
money that we meet immediately just for
a little while maybe a couple of years
and for the long term which is three
years or more accel violence is financed
that's obtained from outside of the
business and I'm going to give you a
list and quickly that define what these
external sources of finances are so an
overdraft an overdraft is where the bank
gives you the opportunity to go above
and beyond your limit so for example if
you've got 10 pound in the bank and you
want to buy something for 20 pounds
you're going to be overdrawn by 10
pounds so you're going to be in minus 10
pounds and the bank gives you a certain
limit which you can go up to in the -
trade credit this is where if you want
to buy something from one of your
suppliers and he may give you 30 days to
pay a bank loan so when you go to the
bank and ask for money so if you go to
the banker say I want 10 grand the bank
would loan you some money but obviously
that money will need to be paid back
with interest
at least this is where you don't buy a
machine or a car you rent it out as such
so you lease it but you never own it so
you pay you say ten pound a month to
rent it out to Li CL but you just use it
as and when you need it and you pay
every month a higher purchase is
slightly different to a lease it's very
similar in terms of you pay every month
but what happens is for example if
you're going to if you want a higher
purchase a car it pay a certain amount
of money every month and once you've
finished the don't you want you pay the
last payment and you finish the ten
thousand pounds you didn't get to keep
that call out cause yours so you're
working towards buying that car over a
longer period of time by paying monthly
installments however you're also paying
interest every month on the higher
purchase so for example if you're going
to buy a car for ten thousand pounds
along with the interest payments you'll
probably end up paying something more in
the region of fifteen thousand pounds
but at least you own the item once you
finish putting the payments grunts this
is a government initiative which for
example if you're going to build an
orphanage for example that's going to
help young children who have not got
parents for example the government may
give you a free amount money just to
help you out because you're doing a good
thing for example so a grunt is
something that you can get externally
from outside the business as a social
finance but you don't pay back a bank
loan we really said that before a
mortgage is like a loan but it's
normally used to buy a house or to buy a
building and you've got obviously pay
that back as well with interest the very
sort or at least
and lastly taking on a new part if
you're a sole trader and you've run out
of money for the business an external
source of finance could be taking on a
new partner and giving him ownership
with the business and so he can invest
some of his own money into the business
obviously there what you're doing is
you're getting someone else's money what
you're losing though is the ownership of
the business you're going to give him
some ownership and you may lose control
of your business because you're going to
have a new partner in the business so in
terms of again short medium and long
term external sources of finance and
overdraft and trade credit could
probably be
something in use just in the short term
you wouldn't use an overdraft facility
to buy a new building because it's only
used for short-term emergencies medium
term between one and three years it
probably use a loan at least a higher
purchase or a grant as an external
medium-term source of Finance and long
term you're looking at loans mortgages
leases higher prices and technology
partner these are large amounts of money
you can you can gain externally and
again these would be used for large
purchases on a more long-term basis
which is three years or more so we've
looked at long term and short term
social finance we've looked at internal
external sources of finance we're now
going to quickly look quickly look at
the main issues that business has when
it chooses a source of finance because
obviously this is a decision needs to be
made on how we're gonna get money and
this is we're going to be looking at how
business chooses and makes decisions in
terms of what finance is going to choose
so in terms of finance and all the
obviously costs our business has to take
into consideration the fact that you
can't just borrow money for free he
always come to the cost and it's
different for certain sources of
finances or money borrowed needs to be
paid back of course and less of course
you get a grant which is external source
of Finance but a grant is the only thing
that you can get which you don't pay
back so I'm giving you three examples
first of all we've got three columns
they've got types of finance the
description of the finance and the cost
of that finance because obviously every
source of finance comes with a cost
apart from a grant so an overdraft then
so an overdraft is an arrangement with
the bank to go past zero or into minus
footage for a short term so if you've if
you're going to buy like for example you
said before if you're going to buy a
machine for five thousand pounds and
you've only got four thousand pounds in
your account if you if the bank allows
you to go overdrawn
you can then go into the - on one
thousand pounds but the cost of that is
that when you go overdrawn or when you
go into - you may have to pay interest a
mortgage you alone and this is a
long-term loan for a big amount of money
to purchase a building or never
expensive item again the cost of this
fine
that you've got to pay back first of all
but also you've got to pay that back on
top with interest and lastly taking on a
new partner or issuing shares and this
is really good because obviously people
are coming into the business now and you
give away part of the business but
you're getting more money because the
erasing more money through through
taking on new people on new shares and
new partners within the business the
cost of the however is that because it
taking on new people and the issuing new
shares are you lose control of the
business with splitting the ownership by
taking on a new partner or issuing
shares which means that you have less
control of the business also because
there's more owners in the business or
more shareholders in the business of
course profits need to be shared out
equally as well so you lose shares up so
you this profit or you did you share the
profits already so today we've looked at
social finance short and long term
balance we've looked at internal and
external sources of finance and we've
briefly gone through the costs of
Finance and the reasons all the issues
that our business may have to consider
when choosing a source of finance