Sources of Finance for a Business Essay

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Sources of Finance for a Business

For a business to successfully run, it must have sources of finance. These are methods of financing the running of the business, buying of stock and paying of workers. Small businesses and large businesses have different sources of finance. In this section, I will discuss the different sources of finance used by small and large businesses, and the advantages and disadvantages of each, starting with small businesses.

Setting up a business costs money. For instance, setting up a bakery involves buying or renting a shop and buying stocks of flour and so on. One source of finance for a new business is equity or equity capital. This is money which is put into the
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Using retained profit has one advantage over borrowing money because the business doesn’t have to make payments on the money that is retained. It does not have to be repaid, so no interest or dividends are due on it. However, a problem with retained profit is that it has to be accumulated, which takes a long time. A business must be successful to have a profit, especially to make enough where they can afford to retain some.

Many new businesses borrow money in order to start. As they continue trading, they may need to borrow more money to survive or expand. Banks are the main source of loans for small businesses. With a bank loan, the business usually borrows a fixed amount of money. It will then pay this back in regular fixed instalments. These repayments include the interest on the outstanding money owed. The bank may ask for security or collateral on the loan, which means that the business must pledge assets to the bank. The bank can sell these assets if the business cannot repay the loan. The most common type of security is property, for example a factory. For a sole trader, there is no distinction between the assets of the business and the personal assets of the owner because of unlimited liability. Therefore, owners might offer their own houses as security. Bank loans secured on property are called mortgages. Mortgages are the main source of expansion for small businesses, as they
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