Unit 3 - Finance and Accounts
3.2 - Sources of Finance

Sourcing finance is critical for starting, operating, and expanding a business. The right mix depends on scale, risks, ownership, and duration.

Internal Sources of Finance

Personal funds: Owners’/entrepreneurs’ own savings or investments.
Retained profit: Profit kept in the business rather than paid to owners/shareholders.
Sale of assets: Selling company property, equipment, or inventory not currently needed.
Working capital reduction: Reducing stock or collecting debts to free up cash.

Internal finance is typically low-cost and available quickly, but may limit capacity or risk personal loss.

Bank loans: Fixed sum borrowed and repaid with interest over agreed period.
Overdrafts: Short-term arrangement to withdraw more than current account balance.
Trade credit: Suppliers allow delayed payment for inputs or stock.
Share capital: Sell ownership shares to investors (public companies—stock exchange; private—Angel/VC investment).
Debentures/bonds: Long-term loans to the company, repaid at set future date with interest.
Leasing: Rent equipment/facilities instead of buying outright.
Factoring: Sell debt to finance companies for instant cash.
Government grants/subsidies: Financial support, often for innovation or social projects.
Crowdfunding: Raise small sums from large pools of online backers.
Venture capital: Large investment from specialist funds/offering expertise, often in exchange for equity.

External finance expands options—but can bring interest, risk, and less control.

Short-term: Needed to cover day-to-day expenses or working capital (< 1 year).
- Examples: Overdraft, trade credit, short-term loan, factoring.
Long-term: Used for major investments (property, equipment, expansion) (> 1 year).
- Examples: Share capital, venture capital, debentures/bonds, long-term bank loans, leasing.

Choosing duration: Match financing period to the length of asset/project life for sustainability.

Source	Type	Term	Main Advantages	Main Drawbacks
Personal funds	Internal	Short/Long	Control, no cost	Limited amount, personal risk
Retained profit	Internal	Short/Long	No interest, flexible	May not be available, restricts payouts
Bank loan	External	Short/Long	Predictable, widely available	Interest cost, collateral required
Overdraft	External	Short	Flexible, solve emergencies	High interest, must be repaid quickly
Trade credit	External	Short	No interest, helps cash flow	May affect supplier relationship
Share capital	External	Long	No interest, large amounts	Loss of control, dividends expected
Leasing	External	Short/Long	Preserves cash, no ownership required	No asset ownership, long-term cost
Factoring	External	Short	Fast cash from sales	Lose some value in fees/discount
Venture capital/Crowdfunding	External	Long	Expertise, market credibility	Equity loss, may lose independence