Classification of finance methods by time period

Methods of finance vary depending on whether a business needs funds for a short, medium, or long period. The time period a business needs finance for affects which method it should choose. Short to medium-term finance is appropriate for raw materials, assets, payroll, or office space rental.

Short- to medium-term finance methods

These methods help businesses manage immediate or temporary cash needs without committing to long-term repayments.

Overdrafts as a flexible borrowing option

Overdrafts allow a business to spend more than it has in its bank account, up to an agreed limit.

Key features:

• Arranged quickly with banks.
• Borrow only what is needed, with interest charged solely on the used amount.
• May include a setup fee.

Advantages:

• High flexibility for varying cash needs.
• Supports cash flow during short gaps.

Disadvantages:

• High interest rates compared to other loans.
• Not suitable for ongoing or large-scale funding.

Leasing for asset use without purchase

Leasing involves renting assets like machinery or vehicles from another company, paying regular instalments over a fixed term.

Key features:

• No large initial outlay required.
• Asset is returned at the end unless a purchase option is included.
• Hire purchase is a variant where an initial deposit is paid, followed by instalments, allowing use during repayment.

Advantages:

• Keeps assets modern and includes maintenance.
• Preserves cash for other uses.

Disadvantages:

• Total cost exceeds buying outright over time.
• Business does not own the asset.

Grants for non-repayable funding

Grants provide a one-off sum, often from governments or organisations, to support specific initiatives.

Key features:

• Require applications with financial details and project outlines.
• Funds may be released only after project milestones.
• Strict rules on how money is spent, with potential withdrawal if not followed.

Advantages:

• No repayment or interest.
• No loss of business control.
• Encourages detailed planning.

Disadvantages:

• Lengthy application process with no guarantee of approval.
• Delays in receiving funds.

Trade credit for delayed payments

Trade credit lets a business receive goods or services now and pay later, typically within 30-90 days.

Key features:

• Improves cash flow by allowing sales before supplier payments.
• Suppliers may offer early payment discounts.

Advantages:

• Eases short-term cash pressures.
• No immediate outflow of funds.

Disadvantages:

• Forfeiting discounts if not paid early.
• Late payments incur fees and damage credit ratings, limiting future options.

Long-term finance methods

These options are designed for substantial, ongoing needs like expansion or major asset purchases.

Loans for structured borrowing

Loans involve borrowing a set amount to be repaid with interest over an agreed period.

Key features:

• Sourced from banks, peers, or family.
• Often requires security like property, which the lender can claim if unpaid.
• Repayment based on interest rate and duration.

Advantages:

• Suitable for startups or equipment buys.
• Retains full business ownership.

Disadvantages:

• Hard to obtain without collateral.
• Not ideal for daily operations due to fixed repayments.

Share capital for limited companies

Share capital raises funds by selling shares in a limited company, either private or public.

Key features:

• Used for large-scale, long-term needs.
• Shareholders gain ownership rights and may influence decisions.

Advantages:

• No repayment required.
• New investors can offer skills and networks.

Disadvantages:

• Dilutes original ownership.
• Dividends reduce profits.
• Expensive and complex to arrange, unsuitable for small amounts.

Venture capital for high-potential businesses

Venture capital provides investment for risky but promising ventures, often from specialist firms or individuals (business angels).

Key features:

• Targets startups or growing firms, typically over $250,000.
• Involves giving up equity and possibly management input.
• Firms focus on established businesses with growth potential.

Advantages:

• No repayment needed.
• Access to investors' expertise.

Disadvantages:

• Loss of some control.
• High expectations for success.