Sources Of Finance

Why Businesses Need Finance

• Start up a business, eg. pay for premises, new equipment and advertising
• Run the business, eg. having enough cash to pay staff wages and suppliers on time
• Expand the business, eg. having funds to pay for a new branch in a different city or country
• New businesses find it difficult to raise finance because they usually have just a few customers and many competitors
• Lenders are put off by the risk that the start-up may fail. If that happens, the owners may be unable to repay borrowed money

Short - Term (External Finance)

• Short - term finances must be paid back within a year
• overdraft facility - where a bank allows a firm to take out more money than it has in its bank account
• Trade credits - where suppliers deliver goods now and are willing to wait for a number of days before payment
• Factoring - where firms sell their invoices to a factor such as a bank. They do this for some cash right away, rather than waiting 28 days to be paid the full amount

Long - Term (External Finance)

• Can be paid back over many years
• Owners - who invest money in the business eg. sole traders and partners this can be their savings. For companies, the funding invested by shareholders is called share capital
• Loans - from a bank or from family and friends
• Debentures - loans made to a company
• Mortgage - a special type of loan for buying property where monthly payments are spread over a number of years
• Hire purchase or leasing - where monthly payments are made for use of equipment eg. a car
• Grants from charities or the government - to help businesses get started, especially in areas of high unemployment

Creditors

• A creditor is an individual or business that has lent funds to a business and is owed money
• Creditors often ask for security before lending funds. This means sole traders and partners may have to offer their own house as a guarantee that monies will be repaid.

Debtors

• A debtor is an individual or business who has borrowed funds from a business and so owes it money
• There is a cost in borrowing funds. Money borrowed from creditors is paid back over time, usually with an additional payment of interest. Interest is the cost of borrowing and the reward for lending
• The type of finance chosen depends on the type of business. Start ups and small firms are considered very high risk and find it difficult to raise external finance. The only source of funds might be the owner's own savings, retained profits and borrowing from friends. Companies can issue extra shares to raise large amounts of capital in a rights issue