Factors Influencing the Sources of Finance

A start-up or small business may rely more on friends and family, personal savings, crowdfunding, or small business loans. Larger, established businesses may have access to more options like issuing shares and bonds, or securing large-scale bank finance.
Businesses in certain industries may find it easier to secure specific grants or bank loans, while others might have better access to venture capital if they have a unique and innovative product.

The purpose of the funds can influence the source a company chooses. Short-term needs like paying off creditors or covering payroll might be best met with overdrafts or short-term loans, while businesses looking to invest in expensive machinery or property may look to long-term loans or leasing options.
For major expansions or taking on significant new projects, a business might consider issuing new shares, partnering with venture capitalists, or using retained profits.

Different sources of finance have different costs attached - interest rates for overdrafts and loans, dividends for share issues, and costs involved in organising a bond issue.
Businesses need to consider the cost-effectiveness of each option, taking into account their ability to manage those costs over time.

Sources of finance also come with varying degrees of risk. High levels of borrowing can put a business in a precarious position if profits fall, while issuing shares dilutes ownership and may result in loss of control.
Businesses need to consider the potential risks alongside the benefits of each financing option.

The prevailing economic climate can also affect a business’s decision. In times of economic downturn, banks might be less willing to lend, and investors might be more cautious, leading businesses to depend more heavily on internal finance, such as retained profits.

The legal structure of a business - whether it’s a sole trader, partnership, or limited company, can also determine the sources of finance available.
Sole traders and partnerships have fewer options compared to limited companies which have the ability to raise funds by issuing shares and can also retain and reinvest profits in the business.