sources of finance

• Firms need finance for 5 reasons

  new firms must start up capital.

  new firms can have poor initial cash flow, they find it hard to cover their costs therefore need additional finance to cover this.

  customers may delay payment, finance must cover this shortfall in liquidity.

  struggling firms may need additional finance to meet its running costs.

  finance needed to expand their business (recruit, upgrade premises, marketing campaigns)
• internal finance 


  finance that comes from inside the business. Can be a quick and easy way to get money.Saves paying interest for borrowed money, although some businesses may not have enough and have to find external finance.
• external finance 


  comes from outside the business and usually needs to be paid back, sometimes with high interest.
• internal sources include..


  personal or business savings, retained profit, selling fixed assets
• external sources include..


  bank loans, overdrafts, mortgages, loans from family and friends, new partners, share capital, venture capital and stock market flotation, trade credit, government grants, hire purchases, crowd funding.
• short term sources of finance


  short term sources will lent money for a limited period of time.
• short term sources include..

  trade credit- an agreement with a supplier to receive goods now and pay at a later date (often 30 days) although if they fail to do so they can end up with a large fee.

  overdrafts-a flexible arrangement with a bank to allow a business to spend more than it has in its account. although they can have a high interest rate and the bank can cancel the overdraft at any time. Bank can take assets if not paid off
• Medium-term sources of finance

  selling fixed assets- firms raise cash by selling assets a business keeps long term (machinery/ buildings) that are no longer in use. There is no limit to how many you can sell although sell too many and you can't go on trading.
• long-term sources of finance #1

  government grants - often given to new or small firms. they do not have to be repaid although they have strict criteria to be able to qualify for them and money may have to be spent in a specific way.

  hire purchase - when a firm purchases something through a deposit then paying the rest in instalments over a period of time while they have use of the product. allows firms to purchase things they usually would not be able to afford. It also means they have use of the product for a longer period of time.
• long term source of finance #2

  Loans - Banks loans: quick and easy to take out. repaid with interest and if not repaid the bank can repossess the firms assets. Interest rate is usually lower than overdrafts interest rate.

  family and friend loans: may be easier, money lent will immediately go into the firm however the lender may want a share in the profits of the firm.

  mortgages: used to buy a property. The property is used for collateral. interest rates are low compared to other option. a sole trader may use their house as collateral to borrow money but can lose it if business fails.
• long term sources of finance #3

  personal savings + forming partnerships- business owner may put some of their own capital in the business to get it started or if it has cash flow problems. they may go into partnership with someone else therefore they can contribute their own capital towards the business. Although they lose their money if the business fails.
• long term sources of finance #5

  venture capital - selling shares to people or businesses who specialise in giving finance to new or expanding small firms.they will usually buy risky shares but have potential to grow quickly they take stake in the business and may expect returns more quickly than other shareholders.

  stock market flotation- private LC sells its shares on the stock market it becomes a public LC. trading shares on stock market means shares can be bought + sold by anyone. this can bring lots of money into the business as this will increase their value.
• long term source of finance #6

  crowd funding- when a large number of people contribute funding towards a business starting up or a business idea. often used for creative or innovative businesses and usually takes place online. normally each person contributes a small amount of money. sometimes the people that contribute money may Get a reward in return.
• four factors affect the choice of finance

  1. size and type of company
  2. amount of money needed
  3. tenth and time finance is needed for
  4. cost of the finance.
• size and type of company

  established firms usually use retained profits than smaller firms but are under pressure from shareholders to give large dividends, reducing the profit retained. a LC can issue more shares. private lc can sell shares if all the shareholders agree to sell them. public lc shares are sold on the stock market by anyone. small firms are unable to issue new shares as and may find it hard to get overdrafts or loans. large firms can get loans easier as they can prove they've been profitable for a long time. larger firms can take larger loans as they have valuable assets
• amount of money needed + length of time the finance is needed for + cost of the finance


  smalls amounts of money usually come from internal sources. for larger amounts of money the firm is more likely to need an external source of finance.

  using savings or an arranged overdraft from a bank are common ways to see a business through a short term lack of finance

  some sources e.g. bank loans and overdrafts are more expensive than others as the money has to be paid back with interest