Sources of Finance

Sources of Finance
Why do businesses need to raise
Reasons for finance
• The raising of money to carry out business
• This can be from starting the business
through to expansion or the setting up of a
new ‘project’.
Where can businesses get finance
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
• 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
• 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
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
– 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
• 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.
Sources of
1. Retained
2. Working
3. Sale of
Make notes on the different types of finance the advantages /
disadvantages of each. (for analysis purposes)
Use of finance
• 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.
GCSE Bitesize
The Times 100
Tutor 2U
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