3.2 Sources of Finance

Internal sources of finance

From within the business, such as savings belonging to the owner of the business

Personal funds, retained profit, sale of assets

External sources of finance

From outside the business: These are injections of funds into business by individuals, other businesses or financial institutions

Share capital, loan capital, bank loans, mortgages, debentures, overdrafts, trade credit, crowdfunding, leasing, micro-finance providers, business angels

Short-term sources of finance

Retained profits, overdrafts, trade credit

Long-term sources of finance

Retained profits, sale of assets, loan capital,, crowdfunding, microfinance, business angels, share capital, leasing

Personal funds

Finance provided by the owners of the business to provide resources

Retained profit

Surplus funds that are reinvested back in the business

Sale of assets

Selling assets they no longer require can raise large amounts of finance for business.

Share Capital

Profit from selling shares for companies

Loan capitals

Finance obtained from lending institutes.

Overdrafts

A banking service that enables customers to withdraw more money from their account than exists in the account.

Trade Credit

Financial service that enables a business customer to obtain products but to pay for these at a later date.

Crowdfunding

Raising finance from large numbers of individual or startup supporters (the 'crowd') for a small amount of money to finance a new business venture.

Leasing

Renting of assets over a contracted period

Microfinance providers

for-profit social enterprises that offer a financial service (e.g. savings, transfer of money, insurance for those on low and very low income) to those without a job or on very low income

Business angels

Extremely wealthy individuals who choose to invest their own money ($15,000 and $750,000) in businesses that offer high growth potential (e.g. high-risk & high-return)

Advantages of personal funds

Zero cost of finance (unless financial institute offers a bank loan or friends or family with expectation to repay with interest)

Disadvantages of personal funds

The size is limited to the savings owned by the owner

Advantages of retained profit

Zero cost of finance (no interest charges)

Disadvantages of retained profit

Opportunity cost (Loss of chance to invest on other things), Dependent on profit

Advantages of sale of assets

Zero cost of finance (no interest charges)

Disadvantages of sale of assets

Funds cannot be raised if the assets are obsolete and there is no demand

Advantages of share capital

Can raise a huge amount of finances - especially for publicly held companies

Disadvantages of share capital

Time-consuming and expensive to prepare and launch

No guarantee of investors/ unguaranteed demand

Advantages of loan capital

There is time given to prepare the money to repay the loan for repaying by installments (한번에)

Disadvantages of loan capital

Depending on interest rate, the cost of borrowing can be high

Collateral (보증) can be taken by the lender in case of business failure

Advantages of overdrafts

Flexible form of finance if its within the agreed figure for unexpectedly large cash outflows, Can be used to meet its precise needs at any time, Simple to arrange - established business customers can often arrange or increase the limit of an overdraft without completing any forms

Disadvantages of overdrafts

Expensive (interest rate varies from four percent to six percent over daily basis; that's why it is  for short-term needs), Bank can rarely demand immediate repayment, especially for well-managed businesses

Advantages of trade credits

Absence of interest charges, Quick money, Time for processing raw materials into goods/ services, Time for earning revenue to pay for the materials

Disadvantages of trade credits

Late payments → Overdue payment penalties

Advantages of crowdfunding

High reward, low initial risk/ Feedback from potential investors

Disadvantages of crowdfunding

Hosting fees to crowdfunding platforms

High competition rate

Advantages of leasing

Useful for expensive assets outright, Only repair and maintenance are to take responsibility about

Disadvantages of leasing

Cost of leasing > purchasing the asset outright in the long-run

Advantages of micro-finance providers

Accessibility to finance for those impoverished entrepreneurs, Job creation by funding micro-business, Social well-being from increased access to healthcare

Disadvantages of micro-finance providers

Unethical lending practices from the state of for-profit entity, Limited sums of finance due to high risk of default, Limited eligibility for borrowers, Ability to repay loans required

Advantages of business angels

Limited experiences guided and advised, Help surviving and existing

Disadvantages of business angels

Loss of control/ intervention, Have to buy out the stakes owned by the business angels