Sources of Finance

Sources of finance

This assignment will look at the different sources of finance that are available to a small business or a big company. With each source of finance listed the report will assess the implications that can arise and along with this the report will look at the cost to the business to taking a certain source of finance.

All businesses need short-term finance from the very beginning to start up the business and to cover day-to-day running costs. This provides the business with working capital. However businesses also need long-term capital to help them to grow and expand, and this is paid back over a number of years. Without finance a business would find it difficult to accomplish anything, for example someone who decided to start up a shop would need finance at first to just buy the shop and the stock.

Here is a table of the internal and external sources of finance which categorise them into short, medium or long term finances.

Sale of assets

An asset is money which will help start up a business. Companies often sell off assets such as premises or any other equipment.

Overdrafts

An overdraft allows a business to withdraw more money from its current bank account than it contains, up to a certain limit agreed previously with the bank manager.

Bank loans

These are the main external sources of finance, they ...

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Here is a table of the internal and external sources of finance which categorise them into short, medium or long term finances.

Sale of assets

An asset is money which will help start up a business. Companies often sell off assets such as premises or any other equipment.

Overdrafts

An overdraft allows a business to withdraw more money from its current bank account than it contains, up to a certain limit agreed previously with the bank manager.

Bank loans

These are the main external sources of finance, they are usually fixed amount for any period of time from 1- 20 years. Regular payments of the sum borrowed plus interest will have to be paid. Their asset will require collateral (security) just in case the owner cannot make repayments back to the bank so their property will be taken away.

Interest payments can be calculated using this formula:

Amount borrowed X percentage rate = amount of interest

For example if you borrowed a £2000 for a year at an interest rate of 6%, the interest would be £60 (£1000/100*6 = £60). The total payment would be £1060.

Hiring purchase

The business usually pays the finance company monthly instalments. Usually a deposit is required to be paid. This asset does not belong to the business until the instalment has been paid.

Grants and loans

The Government will give you grants only if businesses are in trouble, to start up a new business in deprived areas and also where there is low employment. Some local Council also give financial assistance to firms that new job in their area.

Selling shares

Private companies cannot sell shares to the public but they can sell to friends and families. PLC will have a benefit of this as they can raise large amounts of capital and invest what they have in the company.

Going public

If a medium sized company wants to raise greater amounts of money for expansion, it could go public, or become a PLC. However it is very expensive to set up a PLC though.

Debentures

Money is lent to a PLC for a fixed period of time at a fixed rate of interest. At the end, the money must be repaid. Interest will have to be paid even if the firm does not make a profit.

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