Sources of Finance

• Why do businesses need finance?

  To fund operations, expansion, and equipment
• What factors determine the right source of finance for a business?

  Purpose of funding, business size, repayment terms
• What are the two broad categories of finance sources?

  • Internal sources
  • External sources
• What are internal sources of finance?

  Funds from within the business's own resources
• What are retained profits?

  Profits reinvested in the business instead of distributed
• What is an advantage of using retained profits?

  No need to repay or pay interest
• What is a disadvantage of using retained profits?

  Limited to the amount of profit generated
• How might a manufacturing business use retained profits?

  To invest in new machinery without loans
• What does the sale of assets involve?

  Selling unused or surplus assets for capital
• What is an advantage of selling assets?

  Provides an immediate cash injection
• What is a disadvantage of selling assets?

  May not raise enough money for needs
• How might a company use the sale of assets?

  To fund restructuring after downsizing
• What are external sources of finance?

  Funding from outside the business
• What is a bank loan?

  A fixed amount borrowed from a bank with interest
• What is an advantage of bank loans?

  Access to large sums of money
• What is a disadvantage of bank loans?

  Interest payments increase overall costs
• How might a restaurant chain use a bank loan?

  To finance the opening of new locations
• What is an overdraft?

  Withdrawing more money than available in an account
• What is an advantage of overdrafts?

  Flexible, short-term solution for cash flow
• What is a disadvantage of overdrafts?

  High interest rates may apply
• How might a retailer use an overdraft?

  To cover temporary cash shortages during off-peak
• What is trade credit?

  Delaying payment for goods and services from suppliers
• What is an advantage of trade credit?

  Improves short-term cash flow
• What is a disadvantage of trade credit?

  Late payment penalties may apply
• How might a clothing store use trade credit?

  To negotiate 60-day payment terms with suppliers
• What is leasing?

  Renting equipment or property instead of buying
• What is an advantage of leasing?

  Avoids large upfront costs
• What is a disadvantage of leasing?

  Total costs can be higher than purchasing
• How might a logistics company use leasing?

  To lease delivery trucks and preserve capital
• What is share capital?

  Selling shares to investors for funding
• What is an advantage of share capital?

  No need to repay funds or pay interest
• What is a disadvantage of share capital?

  Dilution of ownership and control
• How might a tech start-up use share capital?

  To raise capital from venture capitalists
• What factors do businesses consider when choosing a source of finance?

  • Purpose of finance
  • Cost of borrowing
  • Repayment terms
  • Ownership and control
• What is the purpose of short-term finance?

  Used for operational needs and cash flow management
• What is the purpose of long-term finance?

  Supports strategic investments like property
• How might a construction firm use trade credit?

  To manage daily expenses effectively
• What challenges do businesses face in accessing finance?

  Creditworthiness, high costs, complex applications
• What is creditworthiness?

  A strong credit history and collateral for loans
• What is a challenge related to high costs of finance?

  Interest rates and fees strain cash flow