Sources of Finance

Internal Sources of Finance

• Personal savings: This is the first source of finance for most people setting up a small business.
• Profits: As a business makes profit, this can be retained and invested back into the business.
• Sale of Assets: Businesses can sell assets they no longer need as a source of cash.

External Sources of Finance

• Bank Loan or Overdraft: Banks can provide loans which are to be paid back with interest over a set period of time. Overdrafts provide short-term finance if a business runs out of cash.
• Trade Credit: Suppliers might provide goods now and allow the business to pay later.
• Hire Purchase or Leasing: Businesses may choose to lease or hire purchase assets rather than buying them upfront.
• Investors: Such as friends, family, business angels, venture capitalists or crowdfunding sources.
• Grants: These are funds given by government or other organizations and does not have to be paid back.
• Trade Factoring: Selling your invoice to third party companies.

Equity Financing

• Shares: Selling ownership in the business in the form of shares to raise funds is common is large businesses.

Debt Financing

• Bonds: Bonds can be issued by the company to its bondholders. Liabilities of the business increase with debt financing.

Remember, the choice of financing depends on the financial status of the firm, cause for raising the funds, risk appetite and duration of the need.