Matching The Terms And Source of Finance to Business Purpose
- The term of the loan should match with the economic lifetime of the asset.
- Short-term finance will need to be paid back sooner and usually costs more than short term finance. For example, a credit card verses a mortgage.
- Short term assets need to be matched with a short-term loan, for e.g. inventory financed with trade credit or overdraft.
- Current assets should be purchased with short-term finance while non-current assets should be purchased with long-term finance.
- Matching principle: involves using the appropriate finance for purchasing an asset.
- Companies carry higher level of debt to equity, while the owners of unincorporated enterprises will carry lower levels.
- Smaller businesses have fewer options for equity capital than large public companies. If they wish to raise equity they must take on another partner or access private equity unlike corporate businesses which can be listed on the ASX.
- Costs, flexibility, level of control and availability of finances must be considered by the business.
Extract from Business Studies Stage 6 Syllabus. © 2010 Board of Studies NSW.