Business Finance

• When a company reduces their working capital, to release finance for other purposes
• Internal finance
• Short term
• Advantages - immediately releases cash, not reliant on any external factors
• Disadvantages - may reduce the liquidity of the business so less able to pay their short term debts
• This finance is provided by the business
• Suitable for larger businesses that are profitable like incorporated businesses
• One factor that affect the choice of the source of finance is the amount of working capital the business has at the moment, whether it can be reduced or not

Debt factoring is when a factoring company comes in and buys your outstanding invoices and advances you a percentage of the total amount, the factoring business then makes profit from the customer

• Internal, short term source of finance

Advantages

• Improves cash flow - it means you don't have to wait for the customer to pay
• Fast access to capital - this money provided by the factoring company means you get your money quickly
• Saves time and resources - because you don't have to wait for collecting the customer payment, then this time that has been saved can be reinvested into the business

Disadvantages

• Can Be expensive - as you are not receiving the same amount of money from the factoring business than what you would if it was from the customer
• Loss of control over payment collection - business might lose their connection with the costumer

Debt factoring is provided by a factoring business

Debt factoring is suitable for all types of businesses 

• When a company sells bonds to interested investors, pays a fixed rate of interest for the life of the debenture
• External finance
• Long term
• Advantages - doesn’t require collateral security, if the debenture is convertible then it may be turned into shares so the business doesn’t have to pay the money back
• Disadvantages - must be repaid by a fixed date no matter the financial stability of the business
• This finance is provided by interested investors
• Suitable for private and public limited companies
• Business would use debentures depending on how quickly they need money