Page 254 - Cambridge IGCSE Business Studies

Cambridge IGCSE Business Studies Section 5 Financial information and decisions

ACTIVITY 19.4

Explain one consequence for a business of the three possible supplier actions outlined above.

Debt factoring
KEY TERMS Although most businesses in the retail sector insist on cash payment for any sales,
most other businesses usually sell their goods to customers on credit terms. Th ese
Trade receivable: amount owed customers become a debtor to the business and are shown in the balance sheet as
to a business by its customers
trade receivables. The longer the period of time a business gives its customers to

who bought goods on credit.
pay, the greater the amount of finance they will need to find from other sources to

Debt-factoring: selling trade
be able to meet day-to-day expenses and other short-term debts.
receivables to improve business
liquidity. One solution to this problem is to sell the debt to a debt-factoring company. Th e
debt-factoring company buys the debt for a discounted amount. This provides the

business with immediate cash. The debt-factoring company gains a profit as it will

receive the full payment from the customer.
Long-term sources
Any source of finance which is required for more than one year is classifi ed as

Trade receivables: see long-term. Some long-term finance might be needed for buying non-current
Chapter 22, page 278. assets with a relatively low value, for example a motor vehicle. Th e amount
needed will be quite small compared to the finance needed for non-current

assets such as a new production line or factory extension. The main sources of

252 long-term fi nance are:
Bank loan
KEY TERM A bank loan is the most common source of external business fi nance. Th e amount

borrowed is offered with either a fixed or variable rate of interest. If the rate of
Bank loan: provision of finance
interest is fixed, then the business can be certain as to how much interest it will

by a bank which the business will have to pay over the whole life of the loan. This reduces the risk to the business

repay with interest over an agreed
of increased costs if interests on borrowing rise in the future. A variable rate of
period of time.
interest can rise or fall depending on economic factors.

Small businesses oft en find it more difficult to obtain bank loans as they are

seen as a greater risk by the banks. If they are able to obtain a loan then this is oft en
at a higher rate of interest than might be charged to larger businesses which are
seen to be at a much lower risk of not being able to repay the loan when due. Also,

larger businesses will often have collateral which they can use as security against
any money borrowed.
Leasing
KEY TERM

Leasing is most often used as a source of finance for non-current assets, in
Leasing: obtaining the use of particular motor vehicles and machinery. In return for having use of the asset,
a non-current asset by paying a
the business pays the leasing company a fixed amount over a set period of time.

fixed amount per time period for This payment is usually paid monthly or quarterly. The asset is not owned by the

a fixed period of time. Ownership
business and at the end of the lease term it can give the asset back to the leasing
remains with the leasing

company. company. The leasing company is usually responsible for the maintenance and
repair of the asset.