Business finance — needs and sources
Why businesses need finance
- Finance is the money a business needs:
- start-up capital (to begin), expansion (to grow),
- working capital (day-to-day), surviving a cash-flow problem.
- It can be short-term (within a year) or long-term, and internal or external.
Sources of finance
- Internal: retained profit, sale of assets, owners' savings.
- External: bank loan, overdraft (short-term), new shares (companies only), leasing, hire purchase, trade credit, crowdfunding, government grants.
- Choose by amount, time, cost, the firm's legal type, and the risk/control accepted.
Practice
Which is an internal source of finance?
Retained profit, asset sales and owners' savings are internal; loans, overdrafts and grants are external.
Practice
A bank overdraft is best suited to:
An overdraft is a short-term source — the account can dip below zero for a while.
Practice
Only limited companies can raise finance by issuing shares.
Selling shares is available only to companies; it raises money but shares out control.
You've got it
Key idea
- finance is needed to start, grow, run and survive
- internal (retained profit, asset sales) vs external (loans, overdraft, shares, grants)
- choose by amount, time, cost, legal type, control