Sources of Finance

Sources of finance We already know that a new business will have many costs e.g. –Premises, stock, wages, bills etc. They need money to pay these costs The money needed to start a new business is called capital There are many different ways of obtaining capital  Can you think of any of them?

Internal and external finance Finance can be obtained from either internal or external sources –Internal means it comes from within the business –External means it is obtained from outwith the business

Internal sources of finance for sole traders and partnerships Owners’ funds –most people invest some of their own money in a new business Selling personal belongings - e.g. a car Reinvested profits –once the business is up and running, any profits it makes can be used to finance its activities

External sources of finance for sole traders and partnerships Taking a new partner into the business Bank loan –small businesses can borrow money from the bank, but in practice the bank is often unwilling to lend  Can you think why this might be? Grants –the government is keen to offer financial support to people wishing to start up a business  Can you think why this might be?

External sources of finance for sole traders and partnerships Bank overdraft –a facility on a bank account which allows the business to draw out more money than it has in the account Hiring and leasing –a way of buying equipment or vehicles in instalments, rather than having to pay the full price at once

Sources of finance for private limited companies Private limited companies have access to the same forms of borrowing as sole traders and partnerships They may find it easier to borrow from the bank They could take on a new shareholder as long as all the shareholders agree

Sources of finance for public limited companies Plcs are huge companies They need access to large amounts of capital – usually millions at a time Their main source of finance is selling shares to the public They can also arrange special long term loans called debentures They can sell off part of the business to another company They can also access many of the sources already explained

How does a business choose the best source of finance? There are several factors to consider: –The amount – how much money do we need? –The purpose of borrowing – what do we need to buy? –How much the finance will cost e.g. in interest –The risk factor – do we have to/ will we be able to pay it back??