The document discusses various internal and external sources of finance for businesses. Internal sources include retained profits from operations, sale of assets, and owner's savings. External sources include bank overdrafts, trade credit, bank loans, leasing, hire purchase, mortgages, issuing shares, and debentures. When choosing a source of finance, businesses must consider factors like availability, time period needed (short vs long term), amount of money required, associated risks, and cost of the finance.

1. Sources
of
Finance

2. What is finance?
Definitions
Finance: This is money
Source of finance: This is WHERE we
get finance (money from)

3. Why do
businesses
need
finance??
Starting up a
new business
Moving to
new
premises
Take over of
another
company
Replacing
old
machinery
Internal
growth

4. Types of Finance
Internal Finance :
Finance obtained from WITHIN the
business
External finance :
Finance obtained from OUTSIDE the
business

5. Internal Sources of
finance
Retained Profit: The profit left after all
expenses have been paid
Advantages:
-It doesn’t need to be paid back
Disadvantages:
-The profits of a small business may be
too low to be of use
-A new business won't have any retained
profit

6. Sale of Assets: This is when a company
sells old assets which it no longer needs
Advantages:
- Saves space as old assets are no longer
there
- It makes better use of the business’
capital
Disadvantages:
- New businesses won’t have any assets
to sell
- It’s time consuming and the business
might not find a buyer

7. Owner’s Savings: The owners of the
business can use their savings as finance
in the business. This is only available to
sole traders and partnerships
Advantages:
- Quickly available
- No interest will need to be paid
Disadvantages:
- The owner might not have enough
savings
- It’s very risky due to unlimited liability

8. Internal finance
Short term
(up to 12 months)
cash in the bank
Medium term
(1-3 years)
Retained profit
Sale of assets
Long term
(3 years or more)
Owners investment

9. External Sources of
finance
Bank Overdraft: This allows the company to
spend more money from their account than is
actually in it.
Advantages:
- It’s easily arranged and flexible
- Cheap as the company only has to pay interest
on the amount overdrawn at any one time
Disadvantages:
- The bank can ask for the overdraft to be repaid
whenever they want to and with short notice
- Cannot be used to finance long term assets
- Interest need to be paid

10. Trade Credit: Gives the business around 1-3
months to pay after purchasing supplies
Advantages:
- No interest
- Useful as the company can sell its finished
product and sell it before having to pay the
suppliers
Disadvantages:
- The supplier may refuse to give discounts or
completely stop trade with the business if
payments are not met.
- Suppliers see smaller, new businesses as
unreliable, therefore they might not allow them
to pay on credit.

11. Bank Loan: This is where a business borrows
money from a bank for a period of 1-10 years
Advantages:
- The business can easily plan ahead, as the
interest rate is fixed
- Large businesses can get lower interest rates
as they are more reliable
- Good for both long-term and short-term
Disadvantages:
- Small companies will need to pay higher
interest rates
- Interest need to be paid
- Collateral is needed

12. Leasing: This is when a business borrows
an asset and uses it in return for monthly
payments
Advantages:
- The company will not have to spend a lot of
money on buying the asset
- The firm will be able to easily update their
equipment
- The leasing company will take care of
maintenance and replace damaged assets
Disadvantages:
- In the long term, leasing will be more
expensive than actually purchasing the
equipment

13. Hire Purchase: Allows a firm to pay for an
item over a long period of time in the form
of monthly payments
Advantages:
- The business will not have to find a lot of
money to buy the item
Disadvantages:
- Interest rates are very high. It may be better to
take out a bank loan
- A cash deposit needs to be paid at the start

14. Mortgages: Long term loans, usually used
to buy land or buildings. Payments are
made over a period of 25 years.
Advantages:
- Very long term. Gives the business a long time
to repay the money
Disadvantages:
- If payments are not made the bank will take
ownership of the building or land
- Interest needs to be paid

15. Issue of Shares: only available to limited companies.
Private limited companies (Ltd’s) can sell shares to
friends and family. Public limited companies can sell
shares to the general public
Advantages:
- Does not have to be repaid
- No interest
- Status and reputation of a company can be raised
- Having shareholders increases the financial security of
the business
Disadvantages:
- Dividends need to be paid to shareholders
- Issuing shares takes time and requires lots of
paperwork
- Ownership of the company will be complicated and
there is the danger of takeovers

16. Debentures: Debenture holders lend the
company money which will need to be
repaid over a long period of time Used to
finance long term expansion.
Advantages:
- Very long term. Up to 25 years
Disadvantages:
- Interest must be paid

17. External finance
Short term
(up to 12 months)
Over draft
Trade credit
Medium term
( 1-3 years)
Bank loan
Lease
Hire purchase
grantsLong term
( 3 years or more)
Bank loan
Mortgage
Lease
Hire purchase
Taking a new partner

18. Making the right choice
To make the right choice, a number of factors
will need to be considered. To simplify the
process, these factors can be summed up in five
questions:
- What source is available? (depending on the
size of the company)
- What is it for? Short term or long term?
- How much money is needed?
- What are the risks involved?
- What is the cost of the finance?