Managing Financial Decisions Essay Example | Topics and Well Written Essays - 3000 words

Managing Financial Decisions - Essay Example On the other hand, sole proprietorship and partnerships have unlimited liability for shareholders. Although, it is easier to set up sole proprietorship or partnership as compared to the limited company, but limited companies have better access to external markets for funding and business opportunities. This implies that there is a separation of the business and individuals holding interests in the company. This type also has the advantage of being able to raise large amounts of funds from external sources. Also, the business is managed by a group of professional directors who have the experience and knowledge to operate different affairs of the business (Bendrey, Hussey, & West, 2004). In addition, only those profits, which are taken out from the limited company’s accounts are taxed as compared. Whereas, the entire profit of sole proprietorship is taxed. 1b Types of Source of Finance Types of Finance Definition Advantages Disadvantages Short Term Finance Trade Credit Credit ob tained by business for inventory and receivables management. It is less costly. It is easier to arrange. It does not require security. It is difficult to arrange large amounts. It is only trade related. Factoring Sale of receivables for cash in advance. It allows transfer of risk associated with credit sales. It frees up cash of businesses tied up in receivables. It is highly costly. It is not available to all kinds of industries. It involves complicated legal terms. Bank Overdrafts Short term borrowing from banks. It is not fixed for a specific period of time. It is suitable for businesses requiring finance occasionally. It is less costly for large companies. It is difficult to manage in periods of high interest rate volatility. It requires personal guarantees from owners or directors of the company. Medium Term Finance Loans Medium term borrowing from banks. It is for specific period of time and less fluctuation in interest payments. It allows businesses to ascertain the cost of f inance in advance. It allows businesses to negotiate terms of repayment according to their projections. It is faster to arrange such loans. It is costlier as compared to overdrafts. It can affect creditworthiness of the business if fails to meet loan obligations. Lease Obtaining the right of use of asset without purchasing them. Allows a business or individual to preserve liquid assets. Fixed repayments are required and the lender can not cancel the agreement on its own. It is difficult to arrange. It is difficult to record and report leases. It may not be possible to acquire all types of assets on lease. Long Term Finance Debt Finance Long term borrowing from banks or other finance providing companies. It allows access to larger pool of funds. It allows to upgrade equipment and machinery on regular basis. It requires security. It involves high interest charge due to its long-term nature. It is difficult to obtain loan for assets other than property in some countries. The accessibil ity to this type of finance depends upon assessment of creditworthiness of companies. It is finance against future profits of the business and can therefore restrict utilization of internal funds for business growth. Debentures and Loan Stock By issuing debt instrument in the secondary market.