What are the sources of finance?

Every business needs financing

These finances can come from various sources, either internally or externally. Which source would depend on the circumstances of the business, such as if it is a

1. Startup or an established business,

2. Large or a small firm,

3. Profitable or not

4. What will it be financing

5. Amount of fund needed

Internal sources would mean finances would have been from

1. The sale of asset(s)

2. Shareholders' funds, or

3. Retained profits, and

4. Personal financing (for sole trader and partnership)

These personal financing could be from the personal savings of the business owner or borrowings from family or friends. These amounts are usually small.

Should it be from an external source, financing could be short-term or long-term. This is determined by the amount borrowed. A large amount would likely require long-term (more than 1 year) to pay of debt, while a smaller amount could be repaid within a year (short-term). It is also determined by how fast the borrower can repay.

The amount required is determined by the purpose of the financing or what the funds will be used for. In general, these are what financing is needed for.

A Startup

1. Premise rent

2. Licences or fees

3. Operating assets such as transport

4. Materials or machines for production

Business Expansion

1. Research and development

2. New machines or equipment

3. Business takeover

4. Setup operation abroad

Business Survival

1. Cover losses

2. Repay short-term expanses such as working capital

RELATED CONCEPT

1. Venture Capital

2. Fixed Capital

3. Short-term finance

4. Long-term finance

5. Working capital

PAST YEAR QUESTIONS

1. Do you think that a bank loan is the best source of finance for an entrepreneur to use to expand the business? Justify your answer. (6 marks) May/June 2018/12

2. Do you think a bank loan is the best source of finance for a firm to choose? Justify your answer. (6 marks) Oct/Nov 2018/11

3. Do you think that using his own savings is the best source of finance for Bill to use for the vehicle? Justify your answer. (6 marks) Oct/Nov 2018/13

4. Identify and explain two factors that a firm should consider when choosing a source of finance for expansion. (6 marks) Feb/Mar 2019/12

5. Identify two possible sources of finance George could use. (2 marks) May/June 2019/12

6. Explain two suitable sources of finance that a firm could use to purchase additional inventory. Recommend which source of finance a firm should use. Justify your answer. (6 marks) Oct/Nov 2019/12

7. Define ‘crowd-funding’. (2 marks) May/June 2020/11

8. Do you think an overdraft is the best way for a firm to solve its cash flow problem? Justify your answer. (6 marks) Oct/Nov 2018/12

9. Identify two reasons why obtaining finance may not be easy for a new business (2 marks) May/June 2019/11

10. Identify two reasons why a business might need finance (2 marks) May/June 2018/11

11. Outline two reasons why Kala’s business might need finance (4 marks) May/June 2020/12

Read all post from Unit 5 - Financial Information and Decisions