sources of finance

• Why is finance essential for businesses?

  Businesses cannot survive without finance.
• What is working capital?

  Working capital is the money needed to finance the day-to-day running of the business.
• What is the purpose of investment capital?

  Investment capital helps the business grow.
• What do businesses need capital expenditure for?

  Businesses need capital expenditure to invest in fixed assets such as buildings and equipment.
• What factors determine the most suitable finance option for a business?

  • How much funding is needed
  • How long the money is required
  • What the finance will be used for
  • The affordability of repayments
  • Availability of personal or business assets as security
  • Willingness to give up a share of ownership
• What are internal sources of finance?

  Internal sources are money generated from within the business or from the owners' own capital.
• What is one way to generate internal finance?

  Reinvested profits are a way to generate internal finance.
• What are external sources of finance?

  External sources are money raised from sources outside of the business.
• What are the advantages of internal sources of finance?

  • Cheapest form of finance as no interest is paid
  • Immediately available
  • Provides a liquidity buffer and potential funds for growth
  • Faster collection of debts improves cash flow
  • Reducing stock holdings can release finance
• What are the disadvantages of internal sources of finance?

  • Money tied up in business not earning interest
  • Cannot be used for other purposes (opportunity cost)
  • Loss of profit distribution to owners
  • Short-term pressures to pay profits to owners can restrict availability
  • Sudden demand surges can lead to lost sales
• What is the working capital cycle?

  The working capital cycle involves cash from suppliers, production, and customers.
• What are some external sources of finance?

  • Bank loans
  • Overdrafts
  • Trade credit
  • Factoring
  • Leasing
• What is a bank loan?

  A bank loan is borrowing a fixed amount for a fixed period of time, typically 3–5 years.
• What is an overdraft?

  An overdraft is the facility to withdraw more from an account than is in the bank account, resulting in a negative balance.
• What is factoring?

  Factoring is a method of turning invoices into cash.
• What are the advantages of hire purchase?

  • Useful for purchasing machinery quickly
  • Finance houses may be less selective than banks
  • Business owns the asset at the end of the hire purchase period
• What are the advantages of commercial mortgages?

  • Property used as security against the loan
  • Interest rates lower than unsecured loans
  • Predictable costs help with budgeting
• What are the advantages of share capital?

  • Permanent capital that does not have to be repaid
  • Shareholders have a say in business operations
  • Large sums of money can be raised quickly
• What are the advantages of government grants?

  • Often do not have to be repaid
  • Useful for small businesses in high unemployment areas
  • Can provide advice and support
• What are the disadvantages of loans?

  • Interest rates can be very high
  • Property not owned until last payment is made
  • Failure to repay can lead to repossession
• What are the disadvantages of bringing in new shareholders?

  • Loss of control over business decisions
  • New investors may seek an exit strategy quickly
  • Decisions influenced by new investors
• What are the disadvantages of leasing?

  • Business never owns the leased items
  • Can be expensive over time
  • Items can be repossessed if payments are missed
• What is the method of gaining the use of capital goods through leasing?

  • Paying a monthly fee for the use of capital goods
  • Allows access to resources without large upfront costs
• What role do professional investors play in business finance?

  • They invest large amounts of capital into small- and medium-sized businesses.
  • They may also provide guidance and support for growth.
• How can government assistance help businesses?

  • Provides finance for start-up schemes
  • Can include grants that do not need to be repaid
• Retained Earnings


  Profits reinvested in the business
• Liquidating Assets


  Selling non-core or redundant assets to generate funds
• Financial Analysis


  Calculating internal sources of finance by evaluating profits, asset sales, and reduced working capital
• Asset Sales


  Selling off underutilized or redundant assets to generate cash
• Reducing Working Capital


  Reducing current assets, such as accounts receivable or inventory, to free up cash
• Deferred Payment Terms


  Negotiating longer payment terms with suppliers or customers to conserve cash
• Asset Sales


  Selling off underutilized or redundant assets to generate cash, such as selling a building or equipment
• Liquidation of Investments


  Selling off investments, such as stocks or bonds, to generate cash
• Recycling of Funds


  Reusing funds that were previously allocated for specific purposes
• Delaying Capital Expenditures


  Postponing non-essential capital expenditures to conserve cash
• Reducing Operating Expenses


  Cutting back on non-essential operating expenses, such as reducing employee benefits
• Collecting Overdue Debts


  Collecting payments from customers who are already overdue
• Sale of Intangible Assets

  Selling off intangible assets, such as patents or copyrights
• Reducing Inventories


  Reducing inventory levels to free up cash and reduce storage costs
• Advantages of External Sources of Finance

  • Access to more capital - Reduced financial risk - Networking opportunities