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.

Understanding Different Business Types

There are many business types of organisation, these all have their advantages, so it is important to know which is better for which task, otherwise a company may find some aspects harder than they should be. The main business types are;

Business Types  

  • A Sole Trader is a business owned by an individual, It can have many employees. Common sole traders could be corner shops or man-with-van businesses.
  • A Partnership is a business owned by two or more people (usually up to 20), the ownership of the business is split between them. A partnership may be a small manufacturing company or some large accountancy firms have larger quantities of partners.
  • A Franchise is a business that is owned by a franchisor, and the licensing to use the brand name is given to the franchisee to sell products under their name. Common examples would be fast food restaurants or garages.
  • A Private Limited Company (or ‘LTD’) is a company that offers shares, but does not sell them to the general public. Generally they will have either small amounts of capital, or very large amounts. The size of the business can vary, and can be a multinational company or a medium sized business.
  • A Public Limited Company (or ‘PLC’) is a company that sells it’s shares on the stock exchange, allowing members of the general public to invest capital into the business.
  • A Co-operative is a business set-up to serve the public, and may have ethical goals, over profits and sales. Some supermarkets work in this way.
  • A Social Enterprise is a business who’s money goes toward a social goal(s). Examples would be a company supporting people with an illness or disease.
  • There are also Lifestyle Businesses who’s owners work as part of their lifestyle. This can depend on the characteristics of the entrepreneur.

Most of these business types operate on two different types,

  • Limited Liability is when only the Business assets can be taken to recover debt. Limited Liability is where the owner is protected from any trouble the business suffers, and vice versa.
  • Unlimited Liability is when the business is not protected from such problems, and if the business were to get into financial trouble or insolvency, then the owners assets could be taken as a circumstance.

An LTD (Private Limited Company), must send a Memorandum of Association and Articles of Association. To receive a Certificate of Incorporation and Limited Liability. Becoming Incorporated means that the company and the owner are seen as two separate entities legally.

To be Unincorporated, would mean that the business and the owner are seen as one legal entity.

Limited Liability
AdvantagesDisadvantages
  • The owner is not responsible for the debts of the company.
  • The business is not effected by the owners problems.
  • Sole traders may find it easier to secure trade credit as it is checked against your credit rating.
  • The owner has to pay Corporation Tax.
  • It usually takes time to register.
  • There may be additional cost as the owner may have to hire an accountant.
  • The owner may face troubles moving profits or assets from the company to him.
  • It may be harder to secure good trade terms with suppliers as they may see the company as a potential liability.
  • This means your business type is Incorporated.