Sources of Finance

What are Sources of Finance

dollar symbol 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. Overdrafts 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. Donations Crowd Sourcing Government Grants Leasing Collateral. 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. Floatation requires $50,000 Mortgage Debentures/Bonds 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.

The Working Capital Cycle

The working capital cycle is a proportion of a businesses working capital that is used to allow a business to operate normally, it is the funds required by a business in order to continue trading efficiently. Without a business being able to calculate how much working capital it needs in order to operate, then it may find it hard to continue to function, the working capital cycle involves anything from inventory and supplies, to production and storage. Without proper working capital, it could lead to business failure.


inflows outflows. the working capital cycle showing individual associated cost below it

The Working Capital Cycle

The working cycle has limited use as a single planning tool, however when combined with multiple tools, it can provide a very powerful overview of what a business works with month, to month. Just because a business has inflows of $1m each month, it does not mean that they make $1m profit. The working capital cycle will also allow a company to identify any ways of keeping a positive cash flow through better trade terms as well.

Each ‘stage’ of the capital cycle has multiple costs associated with it. Just because a product needs to be stored, does not mean it has not cost, there may be refrigeration cost, it could be perishable, it may need a security guard to look after the facility, the lights and electricity around the building all need to be paid for. It is important that a customer receives the product as soon as it is made, as it means that overall there is less cost associated with the product, additionally for products like clothing and fashion accessories or technology, the longer it is stored could also mean that its value is decreased as it goes out of fashion.

Over trading could also mean that a company may not be able to pay for the process to be completed using its normal working capital and may have to secure new funds for the time being until the debt is paid after they have sold the product.