Firms need finance for various reasons such as expanding operations, purchasing equipment, or covering costs during economic downturns. Finance can be obtained internally through retained earnings or sale of assets, or externally through methods like bank loans, shares, overdrafts, or grants. The appropriate source depends on factors like the amount needed, the time period, and the business structure. Short-term finance is generally suited for durations under 5 years while long-term options include shares, debentures, and mortgages intended for 5 years or more.

1. Sources of finance
Business Unit 1

2. Why do firms need finance?
– To
– To
– To
– To
– To
– To
– To
– To
expand
buy new equipment
start up a new business
pay workers
buy premises
survive
buy stock
cover a fall in demand (recession)

3. Sources of Finance
Sources of Finance can be either:
Internal
Internal can be cheaper, but
spending this money on the business
means the money can’t be spent on
other projects like investing
External
Comes from outside the
business. This usually
costs more as interest
may be charged

4. Types of Finance
• Internal
– Personal savings
– Retained profit
– Working capital (money
– Sale of assets
– Debt Factoring
in the till)

5. Types of Finance
• External
– Shares capital
– Debentures (secured loan)
– Mortgage (secured loan)
– Other loans
– Overdraft facilities
– Hire purchase / leasing
– Trade credit
– Venture Capital
– Grants

6. How much finance can a business get?
• It depends on risk assessment
based on:
– The type of business
– Stage of development
– State of the economy

7. Choosing the right type of
finance is based on
How long the money is
needed for
The legal structure of
the business
• The duration of the loan
should reflect the time
they expect to need the
purchase for
• A sole trader can’t sell
shares
– You would not take a 5
year loan for a van that
you expect to last 3
years
• The liability of the
owners must also be
taken into account

8. Liability
Unlimited Liability
– The owners of the
business are personally
liable for any debts
which the business may
have (Can be risky)
Limited Liability
– The liability of the
owners (the
shareholders) to pay off
debts is limited to the
amount of money which
they have invested in
the business (Safer)

9. Time Periods for Finance
Finance is generally considered to be
either:
Short-term
Short/Medium
Long-term
1 year
2 to 5 years
Over 5 years

10. Borrowing Money
Time
frame
Possible
usage
Short term
1 year
Working capital, raw
materials
Short (medium)
term
1 – 5 years
Long term
Over 5
years
Capital expenditure
(vehicles,
refurbishments etc)
Major capital
expenditure (buildings,
lands etc)

11. Types of finance
• Long term finance
– Normally for large
projects like
expanding, research
or producing a new
product.
– Often less interest
to pay back on this
type of finance
• Short term finance
– Often used to fill
gaps in the cash
flow of a business,
like paying rent.
– Often flexible and
comes at a higher
rate of interest

12. Long Term Finance
• Share capital
(5 – 25 years)
(PLC & LTD only)
• Shares are sold by the business to
raise capital. In a PLC this is done on
the London Stock Exchange, LTD you
must know the seller, the profit share
they get is called a dividend
• Venture Capital
(PLC & LTD only)
• Someone will buy shares in the
business to help them grow faster and
sell them at a profit (Dragons Den)

13. Long Term Finance
• Debentures
(5 – 25 years)
(PLC & LTD only)
• Is a secured loan. Interest is paid to
each holder, this is paid before any
money is paid to share holders
• Mortgages
• Is secured a contract that means the
loan is secured on property and that
the party buying it will not own the
property till its fully paid

14. Long Term Finance
• Loans
(5 – 25 years)
(this can be a short term source too)
• Normally given out by the bank, will
have to repay over a set number of
years with interest, paid at the same
time every month
• Retained Profit
• Profit the business has made and is
reinvesting in the business, this is
often used to buy stock, and pay
wages on a weekly basis

15. Long Term Finance
• Grants
(5 – 25 years)
• This is money given to the firm by the
government, this money does not have
to be repaid

16. Short Term Finance
(up to 5 years)
• Leasing equipment
• Will allow you to rent out equipment over
time instead of buying it, useful if you only
need equipment for a short time, but you
never own it
• Hire Purchase
• Like leasing but you pay every month for the
product / equipment, instead of paying in one
go, it means you don’t have to spend a large
amount at once, and you keep it after

17. Short Term Finance
(up to 5 years)
• Bank overdrafts
• is a negative balance that the bank allows you
to use in emergencies, this is repaid when
money goes in to your account, high interest
but flexible
• Trade credit
• is an amount of time that firms give you to
repay them for items they have sold you
(normally 30 days)

18. Short Term Finance
(up to 5 years)
• Factoring
• A factoring firm will buy a firms debts and
assume the risk on non-payment. The factor
collects the debts directly from the
businesses customers. (But pays less for the
debt than owed)

19. Question Time
• All students must have one question !!
• Write 3 down in case somebody else
asks it.
What’s Business

20. Did you bring your text
book?
And Homework!!

21. Owner’s funds
Benefits
Explanation
Drawbacks
Money put into the  No need to  Could have been
business by the
pay interest
invested elsewhere,
owner
earning a higher profit
on the
money
 Owner may not have
enough funds to meet
the needs of the
business

22. Retained Profit
Explanation
Money kept in the
business by the
owners
Benefits
Drawbacks
 No need to  Could have been
pay interest
invested elsewhere,
earning a higher profit
on the
money
Known as retained
 The business may not
profit on the
have enough retained
balance sheet
profit to meet its needs
 Shareholders may
become unhappy if this
means lower dividend
payments

23. Selling Assets
Benefits
Explanation
Drawbacks
Items owned by
 The business is  The business has to
the business are
using money it
have something
sold and the
already has –
worth selling for
this to be an option
money made used
so no need to
to finance the
take on loans or  The business may
business
pay any interest
sell something they
or charges
later need

24. Overdraft
Benefits
Explanation
Drawbacks
The bank allows
 Very quick to  Only suitable for
arrange
the business to
smaller amounts and
draw more money  A good short
has to be repaid
from their bank
within a short
term solution
amount of time
account than they
to a cash flow
actually have in it
problem
 Interest or charges
are paid

25. Trade Credit
Explanation
Items are bought
from suppliers on
a ‘buy now pay
later’ basis
Benefits
 Gives the
business
more cash to
use in the
immediate
future
Drawbacks
 Can only be used to
buy certain goods
 Bills usually have to
be settled within
30,60 or 90 days,
usually 30!

26. Debt Factoring
Benefits
Explanation
Drawbacks
The company sells  Allows the
 Time consuming
to arrange
a debt it is owed
business to get
to a debt factoring
money for debts
 The business
company who pay
that might
receives less
the business a
otherwise never
money than it
have been paid
smaller sum than
was originally
they were owed
 Saves the business
owed – this may
time chasing
affect
profitability
customers etc for
money owed

27. Leasing
Benefits
Explanation
Drawbacks
Used to help
 Cost of the
 May be more
obtain new
asset is
expensive than
equipment eg cars
spread over
buying the asset –
its life
the owner will want
The business rents
 No need to
to profit from the
the item from its
deal
find a lumpowner
sum of money  The business does
to purchase it
not own the asset so
it does not appear on
the balance sheet

28. Debentures
Explanation
Long term
borrowing similar
to selling shares,
but with the
promise of
repaying the
amount lent at a
fixed period in
time, usually for a
set amount of
interest
Benefits
Drawbacks
 A very
 Usually ‘secured’ onto
structured
assets of the business
method
such as property,
which allows
therefore if the
the business
interest on the debt,
to know
or the debt itself isn’t
exactly how
repaid, the debenture
much interest
holder will claim the
item/property
will be paid
and when the  No longer a popular
debt has to
method of finance for
be paid back
businesses

29. Bank loan
Explanation
An amount of
money is
borrowed from the
bank, then repaid
(with interest)
over a set period
of time
Benefits
Drawbacks
 Easy and quick  Interest payable
to set up
 If repayments
 Large amounts
cannot be kept up,
of money can
the business risks
be borrowed
getting a poor credit
 Structured
rating or being
repayment
made bankrupt
term

30. Issuing Shares
Explanation
A share in the
business is
sold to an
individual or
another
business. This
money then
used to
purchase new
assets
Benefits
 No need to
repay the
money
invested
 Cheaper than a
loan.
 Some
businesses can
raise large
sums of money
this way
Drawbacks
 Need to pay the
shareholders a share of
future profits
 Ownership also means
some influence over how
the business is run – the
original owners may lose
control of the business
 Risky for the shareholder
- the investment may be
lost if the business fails

31. Mortgage
Benefits
Explanation
Long term loan  Only method
provided by a
available to buy
property
bank in order to
buy property
 Structured
repayments over a
long term (25 years)
Drawbacks
 Large sums of
interest
charged
 Can take a long
time to repay
debt

32. Government Grant
Explanation
Money given to the
business by the
government.
Used to help finance new
projects – especially those
that create new jobs
Benefits
 No need
to repay
the grant
Drawbacks
 Limited funds
are available
 May be
restrictions on
what the money
can be used for

33. Hire Purchase
Benefits
Explanation
Drawbacks
An item is bought  Flexible method –  High interest
often charged
on finance,
can hand back
repayments are
the item if no
 Item doesn’t
made each month
longer required
belong to the
until the final
and payment will
business until
stop
payment when the
the end of the
item becomes the
term
property of the
firm

34. Venture Capital
Explanation
Venture
capitalists
invest in small,
risky business
e.g. new
business startups
Benefits
 Can raise money
from them even
when banks have
refused to lend to
the business
Drawbacks
 Risky for the
venture capitalist
 The VC may want
to have some
control over how
the business
operates