3.2 Sources of Finance

Internal Source of Finance

Money for a business that is raised from the business’s or owner's existing assets.

three main internal sources of finance

personal funds

retained profits

sale of assets 

Personal Funds

refers to money invested by the owner or owners of a business. When businesses are first set up, the owners may need to invest their own money to start the business.

Retained profit

money a company has left at the end of the trading year after paying all costs, expenses, dividends and taxes.

Sale of Assets

when a business sells one of its fixed assets to raise large amounts of money that can be reinvested into new projects.

External Sources of Finance

Money for a business that is raised from outside the business, such a bank loan.

three main groups of external sources of finance

equity finance

debt finance

other sources of finance 

equity finance

A type of funding whereby the provider receives part ownership of the business in exchange for the finance.

categories of equity finance

business angel

venture capital

share capital

Business angel

A wealthy business person who invests their money into new businesses.

Venture capital

Financing that pools resources from a group of investors to fund new businesses.

Share capital 

Finance for a business that is raised through the issue of shares to new investors on a stock market.

Debt finance

Money that is borrowed from a bank or other financial institution, usually to fund investments.

Forms of Debt Finance

loan capital

overdrafts

microfinance

trade credit

Loan Capital

medium to long-term finance borrowed from a lender, usually secured with collateral, and used to purchase fixed assets that are repaid over time.

Mortgage

A special type of long-term loan that is used to purchase land or buildings.

Overdrafts

A high-cost, short-term loan attached to a bank account. It allows the account holder to withdraw an amount of money that is greater than the amount they currently hold.

Microfinance

Financial services provided to individuals who have very limited income and assets and are not able to get services from traditional banks.

Trade credit

A type of external finance whereby a business receives products from a supplier immediately, but pays for them at a later date.

Leasing

A business renting (hiring) a fixed asset over a period of time, rather than buying it.

Crowdfunding

A form of finance where many people invest small amounts of money to fund a business or project.

Short Term

to meet immediate liquidity needs and those up to the next six months

Medium Term

To achieve an objective within a period of the next six

months to two years

Long Term

to finance a longer term strategic plan

Main short term external finance

Overdrafts
Trade Credit

Main medium term external finance

Leasing
Medium term bank loan

Long term finance

share capital
long term loans
Business Angels
Venture Capital