Section B 3.

1 Sources of finance Notes:

Business need money to do all these things: to pay wages, to buy raw materials, to pay for promotional activities, to fund research and development and to enable them to invest in new machinery and equipment. All of these different things require different sources of finance. Some will be internal (from within the firm), and some external (from outside the firm). Choosing a good source of finance is very important. When choosing a source of Finance there are different things a business might consider: Cost: Business will look for sources that are cheap. Status and size: Small firms may be limited in their sources as they lack sufficient security. Large firms have access to many sources including a flotation on a stock market. Financial situation: Firms that have significant loans, may face problems with the lenders because they will not provide funds to them because they might think the business will not pay. The external environment: Firms will need to aware of market trends and research available sources of finance. Organizational goals: For example one goal can be that the business would like to grow. Risk: The riskier the use of the funds the harder it will be to find a lender. Availability of security: Small firms may find it difficult to borrow large sums for long periods, as they do not have sufficient assets of value to offer as security. Forms of finance: Equity (Equity is share capital risked by the shareholders.)

Debt (Debt includes all forms of borrowing from sources external to the firm.) Source: external or internal. Duration: permanent, short-, medium- or long-term. Internal sources of Finance: When a business is finally set up the money that they need is sourced by founder, friends or someone in the family. This is not consider as a loan.