Businesses often have to make use of different sources of finance when considering business expansion and profitable ventures. Finance will be required in situations where a new product has to be launched, business expansion and growth is on the horizon, there is a need to enter a new market, production has to be maximised etc. Whatever the reason, it is always for a profitable cause, as is the usual motive of any business organisation. In some situations, this financial need could also be in order to generate an influx of cash, which could be for the rectification of liquidity or working capital problems. It could also be to improve cash flow position or to serve as a form of funding the investment of purchasing fixed assets. Businesses often opt for long term loans as a form of funding. This is because banks are willing to give large sums of money to corporate entities. This is especially true of particularly large business organizations which have be good reputations and are known for their success.
Banks give loans willingly to businesses such as these as there is lower risk in giving the loan, as the chances of recovering the loan is very high. In addition to this, the collateral offered is also quite high, so there is significant security offered.
Another method of finance is debt recovery, or debt factoring, in which case the business recovers the debts which are a result of selling goods and services on credit. This allows a large influx of cash into the business, which can be used as finance, depending on the amount that has been recovered.Since some businesses cannot waste their resources by spending large amount of time on following up on trade receivables, this process is often outsourced to another company, who offer services specialised in following up on debtors and collecting the amount.
They often use techniques such as a skip trace, where they track down the trade receivable in hopes of getting him or her to settle the debt. This is especially if suspicious activity is suspected where the debtor has continuously defaulted on the repayment of debts. The only problem in this method is that the firm will not receive the full amount of the debt, as a percentage of the debt will be kept by the debt factoring firm as their profit. When considering which form of Finance to use, the business should assess whether it is medium, long term or short term finance, depending on the purpose for which finance is required.