What are Sources of Finance
There are three different sources of finance, Short Term, Long Term and Medium Term. The most popular way of attaining funds for a business is through equity (money flowing into the business) with over 39% of businesses using this method, examples of this would be retained profit or capital from shares.
Short Term (30 days or less)
Medium Term (less than 6 months)
Long Term (6 months+)
- Sale of assets, selling business assets, such as product stock or vehicles.
- Lease-Back, Selling company property, then leasing it back. similar to rent to own, however the business owned it previously, but sold it to use the cash. This is usually very extreme and would only happen when a company is becoming insolvent. Sometimes can be longer than 30 days.
- Sponsorship, sometimes sporting companies can sponsor businesses.
- Trade Credit, retrieving goods and delaying payment for up to 30 days, usually this is enough time to sell the finished product, so prevents bad cash flow.
- Debt Factoring, Selling debt to companies, for less than its worth, allowing them to chase up debtors.
- Can be instant
- Could be cheaper than perusing the debt.
- Could generate a bad reputation if they are harsh.
- Short Term Sources of finance usually are less than they are worth, and usually allow a business to continue trading and prevent insolvency.
- Family Loans, does usually not require payback for a long time. Returns can also be small.
- Crowd Sourcing
- Government Grants
- A Bank Loan
- Stocks and Shares
- Personal Finance
- Venture Capitalists
- Business Angels
- Generally they come to a business, rather than the other way around.
- Generally they do not inter-fear with the business.
- They may not want payback.
- Very Long term
- Usually a significant amount of money
- Fixed rate of interest
- Reduces Collateral
- Interest is payable
- Companies may have invested interest
- Retained Profit
- You have to have money to make money.
- May cause insolvency
- Needs time to re-build
- prevents investment in other areas
Sources of Finance in IT
Some Sources of finance can be de-facto, because it is easier. examples would be the IT industry, it is easier to lease IT equipment because it can allow for no capital outlay, meaning that they do not have to pay in full to have the equipment, but can pay in instalments.
Peer-to-Peer Funding is also becoming increasingly popular, whereby companies borrow money from large businesses and cut out banks to save cost on interest.