ACC1130 Group Coursework 2
a)
i) Explain the external sources of finance that may be available to a company and the benefits or drawbacks associated with each.
-Bank Overdraft
In time there are some circumstances when people or small growing businesses cannot support themselves, therefore they are lead to taking out a bank overdraft. A bank overdraft is like a flexible form of borrowing which is considered by many an ideal choice as it is it is easy to arrange, is flexible and consist of competitive interests rates.
-Debt Factoring
This is the process in which a business sells its outstanding customer accounts to a financial institution. This is mainly the accounts of customers who have not paid their debts to the business. Then the debt factoring company will then pay off 80-85% of the debts to the business and will then collect the full amounts from the debtors. This will save the company management cost and release the time of key personnel for more profitable ends. However this will reduce the total revenue from the sales.
A business sells its outstanding customer accounts (those who have not paid their debts to the business) to a debt factoring company.
The factoring company pays the business - say 80-90% of face value of the debts - and then collects the full amount of the debts. Once it has done this it will pay the remaining amount to the business less a charge.
It is a good way of raising cash quickly, without the hassle of chasing payments. BUT it is not so good for profits since it reduces the total revenue received from those sales.
-Invoice Discounting
This process involves a financial arrangement which benefits the liquidity of the business. Invoice discounting is an alternative way of drawing money against your invoices. However, here the business will keep its sales ledger. This process will provide a cost effective way to improve the business’s cash flow. This form of finance is more attractive than factoring...