Sources of finance

This topic in component one covers internal and external sources of finance include a few sources.

Sources of finance

Refers to where a business gets money from to fund the business activities/actions.

Internal sources of finance

Are generated from within the business. (money that is generated inside the business)

External sources of finance

Are those raised from outside the business (money that has come with outside of the business)

Owners capital

Is the money invested into the business by the owner (often though their personal savings). this is a long term source of finance but its limited

Retained profit

Is the profit that the business has kept a side in order to reinvest back into the business. this is a short to medium term source of finance

Sale of an asset

The sale of assets refers to selling assets already owned by the business in order to have the cash to spend on other things instead

Overdrafts

When a business withdraws more cash from a bank than it holds. Essentially overdrafts are a facility provided by banks which allow the business to overspend by an agree sum or limit. In other words the business can spend money they don’t have which means they become ‘overdraw’. This is a short term source of finance.

Bank loan

When a bank lends an agreed upon amount of money over a set period of time. During this, the business will then pay interest on top of the monthly amount. This is a long term source of finance.

Share capital

Is money raised though the sale of the shares in the business. this is only for LTD and PLC legal structures. This is a long term source of finance.

Commercial mortgage

A type of loan that is specifically designed for purchasing commercial properties where the property is security against the loan is the property. This is a long term source of finance.

Taking on a partner

Sole traders or partnerships may decide to take on a business partner or partners who then invests money into the business in order to own part of the business. This is a long term source of finance that dilutes ownership.