What Are The Sources Of Finance?

For many businesses, the issue about where to get funds from for
starting up, development and expansion can be crucial for the success
of the business. It is important, therefore, that you understand the
various sources of finance open to a business and are able to assess
how appropriate these sources are in relation to the needs of the
business. The latter point regarding 'assessment' is particularly
important at A2 level where you are expected to make judgements.

Internal Sources

Traditionally, the major sources of finance for a limited company were internal sources:

• Personal savings
• Retained profit
• Working capital
• Sale of assets

External Sources

Ownership Capital

In this context, 'owners' refers to those people/institutions who are
shareholders. Sole traders and partnerships do not have shareholders -
the individual or the partners are the owners of the business but do
not hold shares. Shares
are units of investment in a limited company, whether it be a public or
private limited company. Shares are generally broken down into two
categories:

• Ordinary shares
• Preference shares

Non-Ownership Capital

Whilst the following sources of finance are important, they are not
classed as Ownership Capital - Debenture holders are not shareholders,
nor are banks who lend money or creditors. Only shareholders are owners
of the company.

• Debentures
• Other loans
• Overdraft facilities
• Hire purchase
• Lines of credit from creditors
• Financial structures of four well known British companies
• Grants
• Venture capital
• Factoring and invoice discounting:
  
  • Factoring
  • Invoice discounting
  
  
• Leasing