Sources of finance – A Level Accounting OCR Revision

Internal Sources of Finance

Retained profits: These are earnings that a company keeps and reinvests back into the business. They do not involve external funding or diluting ownership.
Depreciation: The loss in value of an asset over time which can be written off as an expense and hence generate capital.
Working capital: Short-term sources of finance that include funds coming from inventories, accounts receivable, and operations.

Bank Overdrafts: An arrangement where a bank allows a business to spend more than it has in its account, up to a specific limit. It offers flexibility as the company only borrows what it needs.
Trade Credit: An agreement where suppliers allow businesses to obtain goods or services but defer payment until a later date.
Factoring Accounts Receivable: The sale of a company’s receivables to get immediate cash.

Share Capital: This involves raising funds by issuing shares. Issuing shares dilutes ownership, but it does not require the company to make repayments.
Long-term Loans: These are borrowed funds that need to be repaid over a lengthy period, typically longer than a year. They often require collateral.
Debentures: Long-term debt instruments issued by a company that carry a fixed rate of interest and need to be repaid at a specific date in the future.
Leasing: A contractual agreement where the owner of an asset allows another party to use the asset for a certain period in exchange for periodic payments.

Government Grants: Non-repayable funds disbursed by the government to businesses that meet certain criteria.
Subsidies: Government-provided supports to keep the prices of goods and services low or to promote certain industries.
Taxation policies: Government policies that allow for tax deductions or incentives that can reduce a company’s tax burden and increase its available capital.