Sources of Finance

All businesses need finance to grow and from time to time to survive. The most important source is money it has saved from profits which have been built u over a number of years. Rather than pay out all the profits to shareholders or owners, the business retains some of the profits it makes and invests them to make more profits in the future.

Internal sources of finance can be long or short term depending on what the money is needed for.

Short term sources of finance:


Overdraft - An overdraft is a short term facility at the bank that allows you to overdraw on your account. Advantages of having an overdraft are that it can be agreed on in advance, and fro many firms a permanent facility can be available. And a disadvantage of taking an overdraft is that the interest rates can be high.

Trade Credit - This is where your suppliers give you time to pay back what you owe them. An advantage of this is that you don’t need to pay for your goods immediately and you have time to sell your products before you need to pay for them. A disadvantage of this is that your customers may want time to pay for the product they have purchased and then you won’t have the money to pay the suppliers.

Hire Purchase – This is often used to obtain equipment or vehicles. The cost plus intrest is paid in equal instalments over a set time. The advantages of this are that the paying time is spread over a vast period of time making the item seem easier to afford, and this would help with the budget.

Long term sources of finance:



Long term sources of finance such as bank loans and mortgages are good as it makes budgeting and planning is easier as repayments are made in regular made instalments. The disadvantage of this is that you have to repay the amount borrowed plus intrest.

Owners and shareholders increasing the amount of money invested in the business. This is a good source of long term finance as you don’t have to repay the amount raised or any interst. But some disadvantages of this could be that any profits that are made may have to be shared out amongst more people, and you may not be able to sell enough shares to raise the money you need to raise.

By Lenzie Academy Int 2 BM Pupils