Introduction
To meet the daily business requirements, Penco management needs sufficient short-term working capital. The working capital of Penco Limited is determined by calculating the difference between its current assets, including cash, accounts receivable, and inventories of raw materials and finished goods, and its current liabilities, such as accounts payable and debts (Bisht, 2021). The ultimate objective of the short-term working capital is to maintain the business’s operations and operational routine.
A company’s long-term funds refer to finances with an investment horizon and a maturity time exceeding one financial year. These finances are assigned to capital investment projects that expand the company’s business operations. They are also used to purchase fixed assets, machinery, and equipment needed to run the business. Long-term funds also reduce dependency on a single capital source, providing greater flexibility and resources to fund various capital needs (Peria & Schmukler, 2017). With long-term funds, Penco Limited can coordinate the decision to purchase all the assets and machinery required for its routine operations.
Sources of Funding
There are various ways that Penco Limited can acquire funds to run its operations, whether on a short-term or long-term basis. Once the funds are received, management needs to implement capital management. Working capital management is a process where a company, such as Penco Limited, designs and monitors a business strategy that utilizes its current assets and liabilities to maximum efficiency. This is achieved through ratio analysis to ensure efficient operation. If Penco Limited has efficient short-term working capital management, then it means that they implement their ideas to improve their profitability and earnings.
It also helps Penco Limited identify and emphasize sections in the business that are important to maintaining its liquidity and profitability (Hakim & Kasenda, 2018). Penco can calculate its operating efficiency, liquidity, and overall company health by establishing its working capital. Positive working capital indicates that a business has sufficient resources to sustain its daily operations and settle its short-term debts. Negative working capital implies that Penco Limited is facing challenges covering its daily expenses and may have trouble paying its short-term debts.
Short-Term Sources of Finance
Short-term working capital refers to the funds used to run a company’s day-to-day operations (Boțoc & Anton, 2017). These daily operations may include purchasing raw materials, managing inventory, paying short-term debt, covering office maintenance, paying staff salaries, addressing seasonal imbalances, and other office bills necessary for continuing the organization’s operations. They may also include funds used to pay or purchase expenses, wages, and daily salaries. These funds can be acquired from installment credit, advances, bank overdrafts, accrued expenses, deferred incomes, commercial paper, commercial banks, public deposits, and trade credit.
Pros
Short-term sources of finance will make the required money available within a short period after approval. This makes it easy to transact quick payments on outstanding bills and to purchase stock in case of other financial emergencies. They are also available regardless of whether the client has a history of bad debt and may be a way to redeem and improve a good credit history (Kliestik et al., 2020). They also do not require a lengthy approval process, making it easy to qualify and offer a flexible repayment period. This makes it easier to repay as one can do so in installments within a given period.
Cons
Short-term sources of finance offer their funds at a higher interest rate. This means that one pays more than one should on a typical day. Due to the flexible repayment periods, they require constant and frequent payments, which may not be convenient for a struggling business or one experiencing fluctuations in its cash flow. This leads to the potentiality of going into debt with the creditor or financer. Short-term financing sources make it hard for a business to have revolving credit and cash (Yakhshibaev, 2011). This happens since some of the money is used to make regular repayments. They lack revolving credit, as one is assigned a particular amount when they make their initial request.
Long-Term Sources of Finance
Long-term sources of finance are firms and institutions that offer funds on a long-term basis with a maturity exceeding one year. Some sources are the capital market, special financial institutions, banks, non-banking financial companies, retained earnings, foreign investment, and external borrowings.
Pros
Long-term sources of financing offer a larger amount of funds and also offer comfortable repayment terms. This is because the amount availed is divided over a longer period; hence, one can repay the loan effectively. Long-term financing provides adequate elasticity in the company’s financial or capital structure (Nieuwenhuijsen et al., 2018).
Long-term funds also enable it to shift risks to the providers of funds, as they must bear the fluctuations in the probability of default and the loss in the event of default, along with other changing conditions in financial markets (Petrusheva, Nikolovski, and Popovski, 2018). They are also a good way to build a company’s business credit and increase its eligibility for a loan quickly. Long-term funding sources are also a good choice if one wants to invest in a long-term operational project. They also have a lower interest rate as banks regulate them.
Cons
It is a permanent burden for the company, as they need to pay the interest on the debt at a specific time, regardless of whether they are profitable. Since they offer funds for a more extended period, long-term financial sources typically use stricter eligibility terms that may not be suitable for everyone. They also require a longer legal processing time and details.
Some of the legal requirements are the need for collateral. This means one needs to ask someone to pledge collateral to qualify for the loan. Many of these long-term financers require that the business be healthy with a regular cash flow (Peria & Schmukler, 2017). This means businesses with variable cash flow are limited from accessing these funds.
Justification for Selecting the Sources of Funding for an Additional £1,000,000 Related to Cost and Risk
After understanding the different types of funding and their sources, Penco Limited can determine which method to use based on its investment needs. Since they are investing in Toyota Motors and Aston Martin, long-term funding and its sources are a more reasonable option. Their investment will be long-term, so they need funds to support these projects. This will help the company minimize costs and risk, as it will have sufficient time to initiate payments, thereby reducing the risk burden of the cost and, consequently, focusing more on generating returns on the investment (Peria & Schmukler, 2017).
The amount Penco Limited wants to add is a substantial £1,000,000. This amount is best taken on a long-term basis, as the interest rate will not be as high as it would be on a short-term basis. Taking the funds from a creditor, such as a bank, will ensure that Penco Limited has enough time to clear the debt. It will also be divided within the period it is to be repaid, making it easier for the company to plan the amount it will repay in each period.
Access to long-term funds is critical for Penco Limited since it can allow the firm to finance significant long-term investments and reduce rollover risks and the potential for runs. Penco Limited must consider the funds available to align its long-term goals and strategies. This will ensure they have enough time to plan strategies to attain adequate returns on the investment (Nikbakht, 2021). Peria and Schmukler (2017) say that if Penco Limited engages in long-term funds and investments, it helps it build sustainable relationships with its investors and creditors. This is because lenders may be willing to engage in long-term financial contracts, as the returns are higher, and because the maturity of these contracts aligns with their long-term savings needs.
Conclusion
Penco Limited also has adequate information on the two companies they are investing in and can, therefore, plan how funds should be allocated to repay the long-term loans. Long-term funding and investment result in higher growth rates and lower macroeconomic volatility. Long-term funds will assist Penco Limited in spreading out all the debt in different areas of the organization. By understanding the returns on the investment, Penco Limited can also select the percentage of the returns that can be used to make repayments. Therefore, Penco Limited should go for long-term investment funding as they make long-term investments and have the necessary means to repay debts.
Reference List
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