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Sources of finance
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Sources of finance
All types of businesses need money to start up, stay
in business or to expand.
Here is an overview of the types of finance available
to businesses.
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Sources of finance
Internal
i.e. from within the business
itself
External
i.e. from outside the business
Short term
1. Owners’ savings
2. Retained profit
3. Reducing the levels of
stock
4. Sale of existing assets
5. Shareholders
•
•
•
•
Overdraft
Short-term loan
Trade credit
Debt factoring
Medium term
• Bank loan
• Leasing
• Hire purchase
Long term
• Long-term loans, e.g.
mortgage
• Venture capitalist
• Grants
• Crowdfunding
Key term: trade credit
Just like a credit card where you buy something
now and don’t pay for it until later.
Trade credit means that you will usually get between
30 and 45 days to pay your bill after receiving the
goods.
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Key term: overdraft
This is a facility provided by a bank when the balance
of your current account goes into negative figures. It
is for an agreed amount and an agreed period of time
and if this is exceeded then high costs will occur.
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Key term: leasing
This is when a business rents an item instead of
paying for it all at once. This way the business saves
money because it makes a monthly payment.
Businesses often lease cars or machinery but they
never get to own them. However, they do get free
upgrades and maintenance so the business’ cash
flow may be more predictable.
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Key term: hire purchase
This is when a business will pay for an item in regular
instalments over a given period of time.
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Key term: venture capitalist
Venture capital is a type of private equity, a form of
financing that is provided to small start-up businesses
that are considered to demonstrate high growth
potential.
Venture capital funds invest in these early-stage
companies in exchange for equity (an ownership
stake) in the companies they invest in.
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Key term: crowdfunding
This is the practice of funding a project or venture by
raising money from a large number of people, who
each contribute a relatively small amount in return for
a percentage of the equity in the business.
For more on crowdfunding, see BUSINESS REVIEW,
Vol. 23, No. 1, pp. 28–29.
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What factors will influence
the choice of finance?
• The length of time, e.g. short, medium or long
term.
• Cost of borrowing, e.g. interest rates and fees.
• Terms and conditions of contract.
• Flexibility of finance.
• The amount of money required.
• The relationship with the lender.
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Student task: cost of
borrowing
The cost of borrowing to businesses and households
is often reflected in the interest rate that determines
the monthly repayments.
1 What is the impact on UK businesses if interest
rates increase from 0.5% to 2%?
2 What is the impact on UK businesses if interest
rates decrease from 0.5% to 0.25%?
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