METHODS OF FINANCE - Loans (LONG TERM)
Loans - A set amount of money provided for a specific purpose, to be repaid with interest, over a set period of time.
Loans are vital for many businesses, providing long term funds for a given period to help finance investment projects.
A fixed sum including interest and repayment is payable monthly, making planning and managing the cash flow much easier.
Loans may be secured against an asset and if there is a default on repayments the asset can be taken.
Financial institutions can vary interest rates depending on the amount of risk placed on a loan
An external source of finance generally considered to be more suitable for longer-term projects. However, this will depend upon the size of the loan and the repayment period.
ADVANTAGES OF LOANS
Loans are vital for many businesses, providing long term funds for a given period to help finance investment projects.
A fixed sum including interest and repayment is payable monthly, making planning and managing the cash flow much easier.
Loans may be secured against an asset and if there is a default on repayments the asset can be taken.
Financial institutions can vary interest rates depending on the amount of risk placed on a loan
An external source of finance generally considered to be more suitable for longer-term projects. However, this will depend upon the size of the loan and the repayment period.
ADVANTAGES OF LOANS
- Quick and easy to secure
- Fixed interest rates allow a firm to budget
- Improved cash flow
- The borrower retains ownership of the company.
- Appropriate method of financing fixed assets
- Interest must be paid regardless of financial performance.
- A firm that has a high proportion of capital raised through debt, may be seen as high risk.
- A firm normally provides security known as collateral
- Often more expensive than other forms of finance
- Can be charged a penalty for early payments.
- Harder to arrange
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