Business Studies

Sources of finance

All businesses need finance. There are a number of funding sources used by organisations.

Why business needs finance

Finance refers to sources of money for a business. Firms need finance to:

• 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.

Sources of finance

Some sources of finance are short term and must be paid back within a year. Other sources of finance are long term and can be paid back over many years.

Internal sources of finance are funds found inside the business. For example, profits can be kept back to finance expansion. Alternatively the business can sell assets (items it owns) that are no longer really needed to free up cash.

External sources of finance are found outside the business, eg from creditors or banks.

Short-term sources of external finance

Sources of external finance to cover the short term include:

• An overdraft facility, where a bank allows a firm to take out more money than it has in…