Sources of Finance

• External 


  An external source of finance is money that comes from outside a business.
• Businesses can externally finance from a variety of methods, including loans from family and friends, bank loans and overdrafts, venture capitalists and business angels, new partners, share issue, trade credit, leasing, hire-purchase, and government grants. These external sources of finance can also be further classified as short-term finance, long-term finance and medium-term finance.
• purpose of short-term finance

  A key purpose of short-term finance is to help a business maintain a positive cash flow.
• short term external sources of finance

  overdraft

  debt factoring

  trade credit
• long term external sources of finance 


  bank loans

  share capital

  venture capital
• Bank Loan


   a bank loan is money lent to a business that is paid off with interest over an agreed period of time. Usually the rate of interest is fixed, which means that the business knows in advance what the cost of borrowing will be and what monthly repayments will be required. This enables the business to plan ahead and manage its cash flow. An example of a bank loan is a mortgage, which is a loan used by a business to purchase a property.
• Share capital is the money raised by a business through the sale of shares in the business
• Share capital is a source of permanent capital because shareholders cannot have a refund on their shares
• Shareholders must find someone else to sell their shares to if they want to sell them
• Shareholders are not promised dividends every year; dividends are only paid if the business has made sufficient money to pay all of its costs
• Buying shares gives the buyer part ownership of the business and certain rights, including the right to vote on changes to the business
• Having the right to vote on changes can slow down decision-making processes
• venture capital


  this is money invested by an individual or group that is willing to take the risk of funding a new business in exchange for an agreed share of the profits. The venture capitalist will want a return on their investment as well as input into how the business is run. E.g. dragons den
• taking on a partner


  sole traders may decide to take on a business partner or partners, who would invest money into the business to own part of the business. However, partners will expect a share of the profits and will often expect to be involved in decision making. Therefore, there is a loss of control.
• medium term external sources of finance 


  Two of the most common sources of medium-term finance for investment in capital assets are hire-purchase and leasing.
• hire purchase


  this is an arrangement whereby the business agrees a contract to acquire an asset by paying an initial instalment and repays the balance of the price of the asset plus interest over a period of time. 
• leasing


  this is similar to renting a piece of equipment or machinery. The business pays a regular amount for a period of time, but the item belongs to the leasing company the business will never own the item