Sources of Finance
Why do businesses need to raise
finance?
Reasons for finance
Finance?
• The raising of money to carry out business
activities.
• This can be from starting the business
through to expansion or the setting up of a
new ‘project’.
Where can businesses get finance
from?
Sources of finance
Categories of Finance
• Internal Finance
– Money is taken from within the business
– Can only be taken once the business is established.
– Tends to be cheaper than external finance.
• External Finance
– Money gained from sources outside of the business.
– Many sources of external finance compared to
internal sources.
– Usually some ‘extra cost’ involved in using external
sources of finance.
– Can be short term and long term sources.
Which of the sources are Internal
and External?
Sources of finance
Internal Sources
• Retained Profit
– Profit kept from the previous year which has not been
paid out to shareholders / owners.
• Working Capital
– Cut amount of debt owed to business (debtors) and
the amount of money tied up in stock to create more
liquidity.
• Sales of Assets
– Sell of parts of the business which aren’t needed or
generate more cash if sold / leased off.
Short Term External Sources
• Bank overdraft – Allows bank accounts to go
over drawn.
• Bank Loan – Pay back over time with interest
• Hire Purchase – Pay for as use. Yours on the
last payment made.
• Trade Credit – Pay suppliers later. Usually 30
days +
• Leasing – Pay for as you use, but give back
after finished with or option of buying.
Short Term External Sources
• Debt Factoring – a separate company pays
invoices for goods when business makes sales.
Get cash before customers settle accounts.
However usually less than original amount
owed.
• Trade Bills – Bill of exchange written up to
promise to pay for goods at a later date
(90days). Bill can be sold on (for less) up to
maturity date. The new holder cashes in the bill
with original customer of goods.
• Credit Cards – Used to pay for small
purchases. Pay back within agreed time or pay
interest.
Long Term External Sources
• Share Capital
– Selling of ownership as shares to raise capital.
• Loan Capital
– Mortgages – To buy property or land.
– Debentures – Creditor who lend businesses money for a fixed
rate of return over a long period of time (25yr). Have no say in
the business.
– Government Assistance – Can be the form of grants or loans.
– Other financial institutions – Can get long term loans for other
reasons, but will have to pay back with interest. Also offer
security.
– Venture Capital – individuals / companies willing to lend to high
risk companies in return for shares or control of business for a
period of time.
Considerations When Choosing
Source
• Cost – How much is the finance going to cost.
• Use of Funds – Depending upon why finance is needed will
determine source type.
• Control – How much control are the owners willing to give up.
• Status and Size of Business – Some lenders will not lend to certain
businesses due to risk involved. Some businesses cannot raise
finance in certain ways (sole traders, partnerships = shares)
• Financial Situation – Is the business able to pay back the finance it
has borrowed?
• Gearing –
– High Gearing = Large proportion of loan capital to share capital
• Raise finance through shares rather than loan
– Low Gearing = Small proportion of loan capital to share capital.
• Raise finance through loans. Have to pay interest.
Tasks
Sources of
finance
Definition
Advantage
Disadvantage
1. Retained
Profit
2. Working
Capital
3. Sale of
Assets
Make notes on the different types of finance the advantages /
disadvantages of each. (for analysis purposes)
Use of finance
Tasks
• Complete:
– Business Studies D.Hall
• Question 1 a and c – page 180
• Question 2 a – d – page 182
• Case Study: Gamingking question d) – page 185
– OCR Business Studies for AS
• B2 Data Response – Mayday Printers – page 11
– OCR AS Business Studies
• Case Study: Trouble for the Trundles q1,3 and 6
– page 33/34.
Reading
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Weblinks
Biz/ed
GCSE Bitesize
The Times 100
Tutor 2U
HIE
ACCA
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Textbooks
AS Business Studies - R.Thompson - Chap 17 pages 109 – 114
OCR Business Studies for AS - I.Marcouse - unit 2 pages 5 – 11
AS Business Studies - A.Motterhead - Chap 4 pages 23- 34
Business Studies for AS - P Stimpson - Chap 7 pages 89 -97
Business Studies - D. Hall - Unit 34 pages 179 - 183