sources of finance

internal sources of finance

• personal funds

• retained profit

• the sale of assets

external sources of finance

• share capital

• loan capital

• mortgages

• debentures

• business development loans

• overdrafts

• trade credit

• crowdfunding

• leasing

• microfinance providers

• business angels

share capital

it is the money raised from selling shares in a limited liability company.

initial public offering

this is when many businesses decide to “go public” by floating their shares on a stock exchange for the first time.

Personal funds

advantage- zero cost of finance (unless money is borrowed)
disadvantage- amount available is limited to the size of savings owned by the sole traders.

retained profits

advantage- sero cost of finance

disadvantages- if the business makes a loss, this source of finance will not be available

• if shareholders are paid high dividends, there will not be much retained profit left to be reinvested into the business.

Sales of assets

advantage- zero cost of finance

disadvantage- if assets are undesirable or there is no demand, fund cannot be raise

• cant be used for a start-up

share capital

Share capital is the money a company raises by selling shares to investors, providing a long-term source of finance without incurring debt.

advantage- can raise a huge amount of finance, especially for public limited companies.

disadvantages- time-consuming & expensive to prepare and launch.

• there is no guarantee that investors will be interested in buying shares.

Loan capital

Loan capital is money borrowed from external sources like banks or by issuing debt instruments like bonds, which must be repaid with interest over an agreed period.

advantage- repayment by instalments gives business time to earn revenue so they can repay the loan.

disadvantage- depending on the interest rate, cost of borrowing may be high

• if collateral is provided & the business fails, the lender takes possession of the assets.

overdraft

allows a business to temporarily take out more money that it has in its bank account.

advantage- flexible finance for unexpected large cash outflows

disadvantage- cost of borrowing is high due to high interest rates compared to other loan bearing sources of finance.

trade credit

advantage- allows time for businesses to process raw materials into goods/services & even revenue so they can pay for the raw material

disadvantage- if payments on invoices are late, businesses can be charged overdue payment penalties.

crowdfunding

advatage- potential high rewards in generating funds with low initial risk.

• feedback from potential investors could provide valuable market research.

disadvantage- cost of finance in the form of hosting fees to crowdfunding platforms.

• low success rate in getting sufficient funding due to competition for funds.

leasing

advantage- useful for businesses that do not have the capital to purchase expensive assets outright.

• repairs & maintainanceare the responsibility of the owner of the asset.

• treated as an expense which helps to reduce profit tax on business.

disadvantage- in long run, the cost of leasing can add up to be more than purchasing the asset outright.

Microfinance Provider

advantage- accessibility to finance for those who are impoverished

• job creation that benefits society by funding micro-businesses.

disadvantages- unethical lending practices as many microfinance lenders operate as a for-profit entity.

• limited sums of finance available due to high risk of default.

• limited eligibility for borrowers as they still have to prove they have ability to repay loans.

Business Angels

wealthy individuals who choose to invest their own money in businesses that offer high growth potential.

advantage- a source of funding for firms that are unable to secure loans from banks and/or investments by venture capitalists.

disadvantage- some loss of control of the business as business angels tend to take a proactive role in the business.

• businesses may have to eventually have to buy out the stakes owned by business angels.