Sources of Finance

Item:

 

1. An unexpected bill for repair of machinery. It must be paid immediately. The business has insufficient funds in it’s bank account.
2. 5 new delivery vehicles need to be purchased for the company.
3. A sports team needs new uniforms.
4. A new machine is required for a printing company.
5. A builder needs to buy materials for building a villa.
6. A new company is looking for start up capital.
7. A firm is looking to recover bad debts.
8. A salesman is paying for flights and accommodation for an overseas sales trip.

Answers: 

1. Short Term. Bank Overdraft because it is the quickest way to obtain money to pay for the bill and it is convenient and flexible. A bank loan would not be necessary in this situation because it is probably not a very large amount of money The business will then have to pay the business back with interest if its account is overdrawn.
2. The business could seek both a long term source of finance or a short term source of finance. If there is an increase in demand for the company than they can try to lease new trucks and pay for them regularly, this way they will be able to meet the increase in demand that they are facing. They can eventually purchase these trucks as leasing becomes very costly after a long period of time.    In terms of a long term source of finance, the business can try to raise share capital to purchase all 5 delivery trucks in the future.  A short term source of finance, leasing, is the more appropriate option for the business as they can start to utilize the trucks immediately and pay for it regularly, paying for it regularly means that they will not have to pay large sums of money at one time. The business can also benefit from not paying for any repair costs of the delivery trucks the firm that owns the trucks is responsible for these payments. The business will have to be careful and purchase the delivery trucks before leasing becomes too expensive. 
3. Short term.  The Trade credit system is probably the most appropriate in this situation, as the sports company will not have to pay for the uniforms immediately. The sports company will pay for the uniforms between 30-60 days later and not pay interest.  The sports company therefore could possibly utilize some of the profit from ticket sales for the different matches during the month to pay for the cost of the uniforms. 
4. Short term. Leasing would be appropriate in this situation because this new machine might only be required occasionally, the printing company would not have to pay large sums of money at one time. The printing company can test this machine over a short period of time and if the machine proves to useful and efficient and the business continues to need the machine they can purchase the machine before leasing for the machine becomes too expensive.
5. Short term. Trade Credit is appropriate in this situation because he/she would consistently need to purchase supplies, when unexpected problems occur or he might need to buy extra equipment that he did not think he needed at the beginning.  Using trade credit is much more suitable because the builder would not have to carry cash while he is working and that makes it convenient.  This system is useful for the firm that employs the builder as they will no exactly how much the materials that were needed cost and they do not have to pay for the materials immediately.
6. Long Term or short term. Share capital is the most appropriate long term external source of finance in this situation because it is very difficult for a new firm to raise capital immediately. They will have to raise share capital possibly from venture capitalists however, the disadvantage of venture capitalists is that they in effect become your boss and are involved in the business. A short term external source of finance could be a bank loan however banks are unlikely to provide new companies with large amounts of money as they are not as established as larger companies and are very risky. 
7. Short term. Bank overdraft is probably the most appropriate short term external source of finance to recover bad debts because the debts become the banks responsibility and the business can start from zero.
8. Short term.  A business credit card, i.e. the bank, would be an appropriate short term external source of finance because the cost of travel and accommodation for an overseas sales trip is a temporary, one off cost and is not as expensive as purchasing new delivery trucks, for example.