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BUSINESS FINANCE SOURCES

Finance Source Categories

Businesses require finance to start up, expand, manage day-to-day operations, purchase assets, and more. Understanding the source is crucial.

1

Internal Finance

Funds generated from within the business itself (Retained Profit, Selling Assets).
2

External Finance

Funds brought in from outside investors, lenders, or institutions (Loans, Share Issues).

Retained Profit (Internal Source)

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Advantages No interest costs, no dilution of ownership, and finance is readily available.
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Disadvantages Limited amount available, may conflict with dividend commitments, and unavailable to new businesses.

Debt Financing Obligation

Loan Repayment

Loans are sums borrowed from banks or institutions, offering large sums of money and predictable repayments. The critical risk is that repayment, plus interest costs, must be made regardless of business performance, increasing bankruptcy risk. Loans require good credit or security (collateral).

External Finance Glossary

Defining critical external methods for raising capital.

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Trade Credit

Delaying payment to suppliers; usually interest-free if paid on time.
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Overdraft

Temporary borrowing facility, high interest rates, good for short-term cash flow.
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Share Issues

Selling ownership to investors; does not need repayment but dilutes control.
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Grants

Financial aid provided by government; no repayment required, but applications are competitive.

Ownership Control vs Capital

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Why would a limited company choose a Loan over a New Share Issue?
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Primarily because a loan avoids the dilution of ownership and potential loss of control that comes with selling new shares.

Overdraft and Credit Tip

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Trade Credit Management: Use trade credit to improve immediate liquidity, but never risk damaging supplier relationships by failing to pay within the agreed period.

Selecting the Appropriate Source

Key factors businesses must evaluate when choosing a finance source.

1

Purpose and Term

Is the need short-term (overdraft, trade credit) or long-term (loans, share issues)?
2

Cost and Risk

Compare interest costs and repayment risk versus non-repayable options like grants or share issues.
3

Size and Urgency

Small, new businesses often rely on family/friends; established ones can access large bank loans or shares quickly.

Source Comparison Matrix

Key considerations when weighing up financial options (summarized view).

Source Cost Repay Control Risk Speed Scale
Rtn Prof Zero N/A Full Low Quick Limited
Loans Int Fixed Full High Med Large
Shares Div N/A Dilute Med Slow Large
Ovrdraft High Int Short Full High Quick Small
Grants Free N/A Full Low Slow Varies
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Business Finance Sources Deck
Term
Categories of Finance Sources

What are the two broad categories of finance sources?

Answer
Internal and External Finance

Internal and external finance.

Term
Internal Finance

What is internal finance?

Answer
Definition

Funds generated from within the business.

Term
Internal Finance Sources

Name three internal sources of finance.

Answer
Examples

Retained profit, selling unwanted assets, family and friends.

Term
Retained Profit

What is retained profit?

Answer
Definition

Profit kept after expenses and dividends, used for reinvestment.

Term
Disadvantage of Retained Profit

What is a disadvantage of using retained profit?

Answer
Disadvantage

Limited availability and may restrict dividend payments.

Term
Selling Unwanted Assets

How does selling unwanted assets help finance a business?

Answer
Explanation

It raises cash by selling unneeded assets, improving liquidity.

Term
Family and Friends Lending

What is a risk when borrowing money from family and friends?

Answer
Risk

It can damage personal relationships if issues arise.

Term
External Finance

What defines external finance?

Answer
Definition

Funds brought in from outside lenders or investors.

Term
Loans

What are loans used for?

Answer
Purpose

To borrow money from banks repayable with interest over time.

Term
New Shares Advantage

What is one advantage of issuing new shares?

Answer
Advantage

No requirement to repay the money raised.

Term
New Shares Disadvantage

What is a key disadvantage of issuing new shares?

Answer
Disadvantage

Dilution of ownership and possible loss of control.

Term
Overdraft

What is an overdraft?

Answer
Definition

A facility allowing temporary borrowing up to an agreed limit on a current account.

Term
Trade Credit

What is trade credit?

Answer
Definition

Buying goods/services now and paying the supplier later.

Term
Hire Purchase

How does hire purchase work?

Answer
Explanation

Paying for an asset through an initial deposit and instalments, with ownership transferring after the last payment.

Term
Government Grant

What is a government grant?

Answer
Definition

Financial aid from the government that does not need repayment but is often conditional.

Term
Choosing a Finance Source

What factors should businesses consider when choosing a finance source?

Answer
Factors

Purpose, cost, control, risk, size and age of business, urgency.

Term
Sources for New Businesses

Which sources are commonly used by new businesses?

Answer
Examples

Family and friends, overdrafts, trade credit, hire purchase.

Term
Sources for Established Businesses

Which sources suit established businesses better?

Answer
Examples

Bank loans, share issues, government grants, retained profits.

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💼 Business Finance Sources Quiz

1. Which of the following is an internal source of finance?

Retained profit is generated within the business, unlike loans and share issues which come from outside.

2. What is a major disadvantage of issuing new shares?

Selling shares reduces the original owners’ control of the company because ownership is shared.

3. Which finance source is most suitable for short-term cash flow problems?

Overdrafts provide flexible, short-term borrowing to cover immediate cash shortages.

4. Why might a new business rely on family and friends for finance?

Family and friends often provide funding informally and quickly, though with potential relationship risks.

5. Which external finance option does NOT require repayment?

Grants are funds provided for free, though with conditions; unlike loans or overdrafts, they do not need to be repaid.

📊 Results

  • Notes and Quiz
  • Business
  • GCSE
  • Accounting & Finance
  • AQA