External sources of finance come from outside the business. Mortgage belongs to external sources of finance. When businesses need to use the money in the long term (more than five years), this creates the need for long-term finance.
The amount of long-term finance needed for buying Fixed Assets, or Non-Current Assets, with a relatively low value such as vehicles will be small. While the amount of long-term finance needed for buying Fixed Assets, or Non-Current Assets, with a relatively high value such as new machinery for the assembly line will be large.
2. Mortgage
A mortgage is a long-term bank loan used by the business for the purchase of land or buildings.
A mortgage is very similar to a long-term bank loan. While long-term bank loans can also be used for business expansion, buying machinery or equipment, mortgages are used specifically for the purchase of land or buildings only.
The borrower obviously pays interest on the amount borrowed. The amount borrowed is paid back in installments over an agreed period of time usually 10, 20 or 30 years.
Mortgages can increase flexibility of the business’s limited capital by allowing for its distribution over multiple investments. It means that the business does not need to spend all its money on purchasing one Fixed Asset only. And then being short on cash to pay for other projects. This will minimize the impact on operational Cash Flow.
By the end of the mortgage term, the amount borrowed must be completely repaid to the lender. If the borrower defaults on the loan payments (fails to repay on time and in full), then the bank can size the property (take it back) without returning any money back to the borrower. The mortgage gives the lender the right to sell the property to repay the loan, if the payments are not made as agreed.
One of the biggest drawbacks of any mortgage is that while a real estate purchase involves a lot of paperwork, buying a mortgaged property involves even more procedures.
All in all, mortgages are secured bank loans for the purchase of property such as land or buildings.
