Sources of Finance

A business will need to be able to raise money to start and keep running. There are different sources of finance and ways of making money.

A business has internal and external sources of finance.

Internal

• Retained profit

Profits made by the business in previous years which have been kept.

• Working Capital

Reducing the amount of stock being kept, delaying payments to creditors and encouraging debtors to pay on time.

• Sale of Assets

Selling anything the business owns, like buildings or vehicles.

• Depreciation (Long Term)

Taking a regular fixed amount out of profits every year to help pay for replacement of assets in future years.

External

• Debt Factoring (Short-Term)

A debt factoring company pays the business some of the money it is owed.

• Overdraft (Short-Term)

This is a short-term bank loan which allows the business to spend more money than they have that they will pay back almost immediately.

• Trade credit (Short-Term)

The business can encourage any other businesses dealing with them to wait longer for their payment so that they can have sold all the goods and have the money to pay.

• Venture Capital (Medium-Term)

Loans to small risky business without asking for security in return for a share of business ownership or profits.

• Bank Loans (Medium-Term)

Money loaned by a bank, to be paid back monthly over a period of time, with interest.

• Leasing  (Medium Term)

This is paying to use an asset belonging to another company for some time, usually if the cost will not be as great as buying the asset for themselves.

• Hire Purchase  (Medium Term)

This is paying to use an asset belonging to another business for some time, and after paying, the asset now belongs to the paying business.

• Share capital / equity  (Medium Term)

Limited companies can sell shares to raise money.

• Changing business status  (Medium Term)

Changing the legal status of the business can help generate funds; a sole trader can become a partnership, for the funds the partner brings.

• Sale and leaseback  (Medium/Long Term)

This is selling an asset to another business and then leasing it back from the business; pay to use it after selling it.

• Debentures (Long Term)

This is a long term loan by a business, 15-25 years, with a fixed interest rate.