Page 255 - Cambridge IGCSE Business Studies
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19: Business finance: needs and sources
Hire purchase
KEY TERM
Like leasing, hire purchase is most often used to finance non-current assets such
Hire purchase: the purchase as motor vehicles and machinery. However, the main difference is that the business
of an asset by paying a fixed does own the asset from the beginning and it is responsible for any maintenance or
repayment amount per time repairs to the asset.
period over an agreed period
Both leasing and hire purchase enable a business to have the use of an
of time. The asset is owned
by the purchasing company asset without the need for a large one-off cash investment. The cost is spread
on completion of the final over time – usually one to five years – and this can be financed out of working
repayment. capital. Both of these sources of finance include an interest charge as part of the
payment.
The main limitation with both of these sources of finance is that they
are expensive as the interest charges are much higher than other finance
options.
Mortgage
A mortgage is similar to a bank loan but is used specifically for the purchase of
KEY TERM
land or buildings. Interest is charged on the amount borrowed and this must be
Mortgage: long-term loans paid each year. By the end of the mortgage term the amount borrowed must be
used for the purchase of land or completely repaid.
buildings.
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Mortgages are used for the purchase of land or buildings
Debenture
KEY TERM A debenture is a type of bond that a business sells in order to raise very large sums
of money. In return for buying the bond or debenture the buyer receives a fi xed
Debenture: bonds issued by rate of interest per year. At the end of the debenture term, the full purchase price
companies to raise long-term
of the debenture must be repaid to the debenture holder. It is usual for a business
finance usually at a fixed rate of
interest. to provide security against the value of the debenture so that the debenture
holder is guaranteed to get its money back even if the business is unable to repay
it themselves. For example, a business may provide the debenture holder with
the legal right to sell some of its land or buildings if it fails to repay the amount
borrowed.
