Business Finance: Needs and Sources

Section I: Business Finance Needs

Start-up finance: This is the initial capital required to start a business. It covers costs such as buying equipment, premises, initial advertising and stock.
Working capital: Money needed for the day-to-day running of the business, such as staff wages, utility bills, raw materials, and credit payment.
Expansion finance: Finance needed when a business is looking to grow or expand, such as launching a new product line, entering a new market, or acquiring another company.
Emergency finance: Funds required to cope with unexpected situations like equipment breakdown, drops in sales, lawsuit costs, etc.

Section II: Short Term and Long Term Finance

Short term finance: Includes overdrafts and trade credit. Short term finance is typically repaid within a year.
Long term finance: This involves finances that are meant to be repaid over a longer period, often many years. It includes loans, leasing, issue of shares, retained profits, grants and venture capital.

Section III: Internal and External Sources

Internal sources: These are finances obtained within the business itself such as retained profits or sale of assets.
External sources: These are financial resources obtained from outside the business. They could be short term, like bank overdrafts and trade credit, or long term, like bank loans, leasing, issue of shares, or venture capital.

Section IV: Factors influencing the choice of finance

The purpose of the finance: For example, long-term objectives like expansion would be best suited to long-term finance, whereas short-term needs like working capital would be suited to short-term finance.
The cost of the finance: Different sources of finance have different costs associated with them. It is essential to consider the interest repayments, dividends or potential loss of control in a business when selecting a source of finance.
The risk associated: High-risk projects might struggle to get finance from traditional sources like banks, and may need to seek alternative funding sources.
The size and status of the business: Smaller businesses might struggle to access some types of finance, while established, large businesses may have more options available to them.
Availability: Some types of finance may not always be available, for instance, during an economic downturn or to new businesses with no trading history.