Sources of finance

Finance is needed throughout a company's life. The type and amount of finance required for a business depends on many factors: type of business, success of firm and state of the economy. There are two main types of money that a company needs.

Capital expenditure: Used for buying fixed assets where large sums of money are involved but they are not purchased often e.g. new premises.

Working capital: Day to day money required for running the business.

There are two main sources of finance, these are internal sources and external sources.

Internal sources include:
Retained profit - profit made is reinvested into the business.
Controlling working capital - reducing costs, delaying outflows and speeding up inflows.
Sale of assets - Assets the company owns can be sold and then leased back which frees up a large amount of capital in the short term.

External sources of finance:
Increasing trade credit - delaying payments on purchases for as long as possible.
Factoring - use a company to collect all debts.
Overdraft - an agreement with a bank to be allowed to overdraw a certain amount.
Grants - an agreed amount of money given for a special reason by government or other organisation.
Venture capital - people invest in the company when it is unable to float on the stock market.
Debentures - business equivalent of a mortgage. Loan for a set length of time at a set interest rate.
Share issues - selling of new shares to raise capital.
Owners savings - the owners investing money into the business.
Bank loans - medium or long term loans but interest is charged.
Leasing - instead of buying.

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