sources of finance

1286 Words Dec 24th, 2013 6 Pages
Sources of finance

Some sources of finance are short term and must be paid back within a year. Other sources of finance are long term and can be paid back over many years.
Internal sources of finance are funds found inside the business. For example, profits can be kept back to finance expansion. Alternatively the business can sell assets that are no longer really needed to free up cash.
External sources of finance are found outside the business. For example from creditors or banks.

Internal sources of finance

Retained profit

Profits generated by a company that are not distributed to shareholders as dividends but are either reinvested in the business or kept as a reserve for specific objectives such as to pay off a debt
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A loan is useful for a business that is starting up or looking to grow. Loans are often used to buy fixed assets (see balance sheets) such as machinery and vehicles. A business will pay the bank back each month in instalments and will also pay an interest charge.

Advantages:
Lower interest rates than overdrafts

Regular repayments help plan cash flow Disadvantages:
Bank can change limit at any time or ask for money to be paid back sooner than expected

Less flexible than an overdraft

Have to pay back in stated time or risk further financial problems

Mortgage:

A mortgage is a long term loan specifically for the purchase of property. Most businesses might buy property through a mortgage. In many cases, mortgages are used as a security for a loan. This tends to occur with smaller businesses. A sole trader, for example, running a shop might want to move to larger premises. They find a new shop with a price of £200,000. To raise this sort of money, the bank will want some sort of security - a guarantee that if the borrower cannot pay the money back the bank will be able to get their money back somehow.

Advantages of mortgages: •you can keep ownership of your business and your business premises. Other investment options might involve you giving up some of your business ownership

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