ITFT- Accounting & Finance

Sources of Business Finance

1. Sources of business
finance

2. Why businesses need
money
•They are just starting and need to buy premises
and equipment.
•They have an opportunity to introduce a new
product or service.
•A major item of equipment or building needs to
be brought up to date.
Businesses need extra money at times
because:

3. The sources of funds 1
•Owner’s funds–
savings of the owner –
or an additional
mortgage taken out on
their house.
•Profits–profits which
have been retained and
not paid out as
dividends.
•Loans–from a bank or
other financial
institution.
•Government grants–
available for specific
reasons, eg expanding
in a deprived area.

4. The sources of funds 2
•Hiring and leasing–this
saves having to buy
expensive items outright as
payments are made in
regular instalments.
•Issuing shares–only applies
to public limited companies
whose shares are bought
and sold on the Stock
Exchange.
•Selling assets–such as
unwanted buildings or spare
land.
•Venture capital–finance
from a company which
specialises in lending to
successful small businesses
–often in exchange for
shares.

5. The amount
required
Factors affecting the choice
of funding
The length of time
for which the
money is needed
The risk
involved
The cost of
the money
Loss of
control
Advice
available
Choosing a
funding method

6. Making the choice 1 –
internal sources
SourceAdvantagesDisadvantages
Owner’s
funds
Owner keeps
control
Could lose
everything if
business fails
Retaine
d profit
Owner(s)
make
decision
Reduces reserves
and possibly future
dividend
payments. May be
insufficient for
needs.

7. Making the choice 2 –bank
options
SourceAdvantages Disadvantages
Bank loanAdvice available.
Repaid over an
agreed period
Bank may refuse.
Repayments may
rise if interest
rates increase.
OverdraftCheaper than
loan for short-
term finance
Bank may refuse.
Only very short-
term.

8. Making the choice 3 –other external
sources
Source Advantage Disadvantage
Governmen
t grant
May not need to
be repaid though
spending closely
checked
Complicated
and restricted
to certain
areas/reasons
Hiring and
leasing
Saves paying
‘up-front’ for an
asset. Asset
may belong to
business
eventually.
Only useful for
obtaining
assets. Costs
more than
outright
purchase.

9. Making the choice 4 –other external
sources
SourceAdvantage Disadvantage
Issuing
shares
Large amounts
available, never
repaid
Only for plcs
Shareholders paid
dividends
Selling
assets
Converts unused
items into capital
Only appropriate if
have unused
assets!
Venture
capital
Large amount
may be available
+ advice
Owner may lose
some control over
business