Sources of Finance

Internal Source of Finance (1)

Owner’s Own Investment

This is money which comes from the owner/s own savings It may be in the form of start-up capital - used when the business is setting up. It may be in the form of additional capital – perhaps used for expansion.

Advantages

  • Doesn’t have to be repaid 
  • No interest is payable

Disadvantages

  • There is a limit to the amount an owner can invest
  • It is only a short term source of finance 
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Internal Source of Finance (2)

Retained Profit

This source of finance is only available for a business which has been trading for more than one year. It is when the profits made are ploughed back into the business. This is a medium or long-term source of finance

Advantages

  • Doesn’t have to be repaid.
  • No interest is payable

Disadvantages

  • Not available to a new business.
  • Business may not make enough profit to plough back
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Internal Source of Finance (3)

Sale of Inventory

This money comes in from selling off unsold stock. This is what happens in the January sales. It is when the profits made are ploughed back into the business. This is a short-term source of finance

Advantages

  • Quick way of raising finance.
  • By selling off stock it reduces the costs associated with holding them

Disadvantages

  • Business will have to take a reduced price for the stock
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Internal Source of Finance (4)

Sale of assets

This money comes in from selling off fixed assets, such as: a piece of machinery that is no longer needed. Businesses do not always have surplus fixed assets which they can sell off. There is also a limit to the number of fixed assets a firm can sell off. This is a medium-term source of finance

Advantages

  • Good way to raise finance from an asset that is no longer needed
  • No interest is payable 

Disadvantages

  • Some businesses are unlikely to have surplus assets to sell
  • Can be a slow method of raising finance
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Internal Source of Finance (5)

Debt collection

A debtor is someone who owes a business money. A business can raise finance by collecting the money owed to them (debts) from their debtors. Not all businesses have debtors ie those who deal only in cash. This is a short-term source of finance

Advantages

  • No additional cost in getting this finance, it is part of the businesses’ normal operations.
  • Better control of debts this means it is unlikely the debtor will not pay what is owed. 

Disadvantages

  • There is a risk that debts owed can go bad and not be repaid.
  • May risk losing customers. 
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External Source of Finance (1)

Bank Loan

This is money borrowed at an agreed rate of interest over a set period of time. This is a medium or long-term source of finance

Advantages

  • Set repayments are spread over a period of time which is good for budgeting
  • Interest charges have been low.

Disadvantages

  • Can be expensive due to interest payments.
  • Bank may require security on the loan
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External Source of Finance (2)

Bank overdraft

This is where the business is allowed to be overdrawn on its account. This means they can still write cheques, even if they do not have enough money in the account. This is a short-term source of finance

Advantages

  • This is a good way to cover the period between money going out of and coming into a business
  • If used in the short-term it is usually cheaper than a bank loan

Disadvantages

  • Interest is repayable on the amount overdrawn.
  • Can be expensive if used over a longer period of time
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External Source of Finance (3)

Additional partners

This is sources of finance suitable for a partnership business. The new partner/s can contribute extra capital

Advantages

  • Doesn’t have to be repaid.
  • No interest is payable

Disadvantages

  • Diluting control of the partnership.
  • Profits will be split more ways
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External Source of Finance (4)

Share issue

This is sources of finance suitable for a limited company. Involves issuing more shares. This is a long-term source of finance

Advantages

  • Doesn’t have to be repaid.
  • No interest is payable

Disadvantages 

  • Profits will be paid out as dividends to more shareholders.
  • Ownership of the company could change hands
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External Source of Finance (5)

Leasing

This method allows a business to obtain assets without the need to pay a large lump sum up front. It is arranged through a finance company. Leasing is like renting an asset. It involves making set repayments. This is a medium-term source of finance

Advantages

  • Businesses can have the use of up to date equipment immediately.
  • Payments are spread over a period of time which is good for budgeting

Disadvantages

  • Can be expensive.
  • The asset belongs to the finance company
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External Source of Finance (6)

Hire purchase

This method allows a business to obtain assets without the need to pay a large lump sum up front. Involves paying an initial deposit and regular payments for a set period of time. The main difference between hire purchase and leasing is that with hire purchase after all repayments have been made the business owns the asset. This is a medium-term source of finance

Advantages

  • Businesses can have the use of up to date equipment immediately. 
  • Once all repayments are made the business will own the asset.

Disadvantages

  • This is an expensive method compared to buying with cash.
  • Can be repossesed if can't keep up with payments
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External Source of Finance (7)

Mortgage

This is a loan secured on property. Repaid in instalments over a period of time typically 25 years. The business will own the property once the final payment has been made. This is a long-term source of finance.

Advantages

  • Business has the use of the property.
  • Payments are spread over a period of time which is good for budgeting.
  • Once all repayments are made the business will own the asset.

Disadvantages

  • This is an expensive method compared to buying with cash.
  • If business does not keep up with repayments the property could be repossessed.
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External Source of Finance (8)

Trade credit

Trade credit is summed up by the phrase: buy now pay later. Typical trade credit period is 30 days. This is a short-term source of finance

Advantages

  • Business can sell the goods first and pay for them later.
  • Good for cash flow.
  • No interest charged if money is paid within agreed time.

Disadvantages

  • Discount given for cash payment would be lost.
  • Businesses need to carefully manage their cash flow to ensure they will have money available when the debt is due to be paid
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External Source of Finance (9)

Government Grants

Government organisations such as Invest NI offer grants to businesses, both established and new. Usually certain conditions apply, such as where the business has to locate.

Advantages

  • Don’t have to be repaid.

Disadvantages

  • Certain conditions may apply eg location.
  • Not all businesses may be eligible for a grant
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