Sources of finance
All businesses require finance. There are a number of ways businesses can obtain the appropriate funding.
Finance always refers to sources of money for a company. Business always require finance for several things such as:
Sources of finance Some sources of finance are for the short term and have to be paid back within a very limited amount of time. Other financial sources are for the long term and can be paid back over a much more extended period of time.
Internal sources of finance are money that is from the business. For example, profits made by a business and have been put into a bank account to receive interest, this will aid financial flexibility. Another form of internal finance is that the firm sells the assets (items it owns) that are no longer required, this will gain additional finance.
External sources of finance are money that is from outside the firm, for example banks.
Short-term financial sources (external) Sources of external finance that is used for the short term includes:
Long-term sources of external finance Sources of external finance to cover the long term include:
Finance always refers to sources of money for a company. Business always require finance for several things such as:
- Creating a business, for example pay for property, new equipment and other important features.
- Maintain the business, for example having sufficient amounts of money to pay suppliers for products and to pay the wages for workers.
- Expand the business, for example having enough finance to pay for a new branch in different areas of the city, country or other parts of the world.
Sources of finance Some sources of finance are for the short term and have to be paid back within a very limited amount of time. Other financial sources are for the long term and can be paid back over a much more extended period of time.
Internal sources of finance are money that is from the business. For example, profits made by a business and have been put into a bank account to receive interest, this will aid financial flexibility. Another form of internal finance is that the firm sells the assets (items it owns) that are no longer required, this will gain additional finance.
External sources of finance are money that is from outside the firm, for example banks.
Short-term financial sources (external) Sources of external finance that is used for the short term includes:
- Factoring, where businesses sell their bills to a bank. They do this in order to receive some money immediately, instead of waiting for a month to be paid the full amount.
- An overdraft factor is where a bank lets a business to take out more money than it already has in its bank account.
- Trade credits are where suppliers deliver supplies quickly and are happy to wait for a reasonable amount of time before being paid.
Long-term sources of external finance Sources of external finance to cover the long term include:
- Debentures are loans made to a firm.
- Grants are available from the government to assist the start-up of businesses, particularly in areas of high unemployment. However there is a lot of competition for this form of finance making it difficult to get.
- Loans from a bank or people who are willing to help the business.
- Owners who want to invest money into the business. For sole proprietors and partnerships this can be from their savings. For large firms, the finance invested by shareholders is known as share capital.
- A mortgage, which is a bank loan designed for buying property where monthly payments are spread over an extended time period.
- Hire purchase/leasing, this is where monthly payments are made for use of equipment and products. Leased equipment is only rented and does not belong to the business. Hired equipment belongs to the business after the final payment has been paid.