Sources of finance
Internal Sources of Finance
- Retained profits: These are profits that are kept within the business rather than being paid to shareholders or invested elsewhere.
- Sales of assets: This involves selling off equipment, property or other assets to raise funds. Though, this could impact the business’s ability to operate effectively.
- Owner’s personal savings: Personal savings of the business owner can be put into business operations.
External Sources of Finance
- Family and friends: Often the first port of call for business owners needing additional finance. They may agree to lend money on favourable terms.
- Banks loans and overdrafts: Both are forms of debt finance. Loans are for long term financing whereas overdrafts facilitate short term financial adjustments.
- Trade credit: This allows the business to buy goods and services and pay for them later. This can improve cash flow but comes with risk if payments are late.
- Venture capital: Funding from individuals or firms that invest in businesses in exchange for equity. Requires sharing profits and control with investors.
- Crowdfunding: Using platforms to ask a large number of people to invest in your business in exchange for rewards, equity, or interest on their investment.
- Grants and Government schemes: Provided by different government bodies to support growth of particular types of businesses.
Factors to Consider when Selecting a Source of Finance
- Interest rates: The cost of borrowing may vary greatly between different finance sources.
- Repayment terms: The length of time over which the money must be paid back can impact monthly outgoings.
- Control: Equity financing such as venture capital means giving up some control of the business.
- Legal and financial status of the business: Some types of finance may not be available to all businesses, such as grants for non-profit organisations.
- Risk: Different sources of finance come with different risk levels - riskier finance sources may have higher costs.
Importance of Financial Planning
- Helps identify potential financial issues before they become serious problems.
- Assists in setting financial goals and making plans to achieve them.
- Provides a clearer picture of where money is going, which can help to control costs.
- Supports decisions about expansion, investment or divestment by ensuring the business has accurate financial information to base these decisions on.