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Learning objectives

Identify at least three reasons why a business

may need finance.
Understand the advantages and disadvantages
of at least 4 sources of finance.
Explain which sources of finance you would use
for your business

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When does a business need finance?
What is finance?
Money used to purchase things the business needs or
want.
What is a source of finance?
It is a method of getting hold of the money you need.
Most of the time you have to pay it back and it can be
expensive.
When might a business need finance?

1. When it is
starting – up.

2. When it needs 3. When it wants

to buy equipment to expand the
or premises. business.
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 How many source of
finance do you know?

Source
of Definition
finance
Sources of finance

Sources of finance are classed as being either internal or

external.

Internal sources:
finance from within
the business.

External sources:
finance from outside
the business.

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Internal Sources of Finance

Internal finance saves a business from borrowing from a

lender and having to pay back interest.
1.Owners Funds/Capital
The owner of the business uses
their own personal savings
and invests in the business

Easy to access, no money to pay

back, no interest to pay
The person may lose all their
savings if the business fails.
Could you use this source of finance to
start your business?
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Internal Sources of Finance

Internal finance saves a business from borrowing from a

lender and having to pay back interest.
2.Selling Assets
The owner decides to sell items
that they own and use the
money to invest in the business.

Money gained can be used to buy

a new asset. No money to pay
back, no interest to pay
The “sold” asset is lost
Could you use this source of finance to
start your business?
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Internal Sources of Finance

Internal finance saves a business from borrowing from a

lender and having to pay back interest.
3.Using Profit (Retained Profit)
The owner decides to use the
profit they have made and
invest this profit back into the
firm.
No money to pay back, no interest
to pay
Owner cannot then have this
money for themselves
Could you use this source of finance to
start your business?
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External Sources of Finance

External sources of finance come from outside a business

and are more difficult to arrange than internal sources.
1.Bank Loan/ Mortgage
Borrowing an amount of money from a bank and paying it
back in instalments. Interest is added to the loan.

Business can spread the cost of the repayments

Interest is added to the amount borrowed
External sources:
finance from outside
the business.

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External Sources of Finance

External sources of finance come from outside a business

and are more difficult to arrange than internal sources.
2. Overdraft
Taking more money out of your bank account than you
have in it.
The overdraft is flexible – you can go overdrawn up to a
maximum (eg Rs.10,000)
Interest is charged for every day you are overdrawn

External sources:
finance from outside
the business.
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External Sources of Finance

External sources of finance come from outside a business

and are more difficult to arrange than internal sources.
3.Hiring and Leasing
Rather than buying an asset, a firm decides to lease or
“rent” the item.
The leasing charge is cheaper than buying the asset.
Faults will be mended by the firm leasing the asset
The asset does not belong to the firm and therefore
cannot be sold

External sources:
finance from outside
the business.
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External Sources of Finance

External sources of finance come from outside a business

and are more difficult to arrange than internal sources.
4.Selling Shares
Persuading members of the public to invest in the
company by buying shares.
(You need to be a PLC or Private LTD to do this)
No money to pay back, no interest to pay
Ownership of the company is “shared” between more
people – danger of a possible takeover
External sources:
finance from outside
the business.
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External Sources of Finance

External sources of finance come from outside a business

and are more difficult to arrange than internal sources.
5.Government Grant or Government Loans
Applying to the government for an amount of money to be
used for a specific purpose. It is usually a loan.

Interest on the loan is cheaper than a bank

Often only available in certain parts of the country where
unemployment is high
External sources:
finance from outside
the business.
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The Goal of the Financial Manager

• The goal of the financial manager must be

consistent with the mission of the corporation.
• To maximize firm value shareholder’s
wealth (as measured by share prices).
• While managers have to cater to all the
stakeholders (such as consumers,
employees, suppliers etc.), they need to pay
particular attention to the owners of the
corporation, i.e., shareholders.
• If managers fail to pursue shareholder wealth
maximization, they will lose the support of
investors and lenders. The business may
cease to exist and ultimately, the managers
will lose their jobs! Business Finance
14
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The Four Basic Principles of Finance

1. Money has a time value.

– A rupee received today is more valuable than a rupee
received in the future (due to interests, investment
returns,…)
2. There is a risk-return trade-off.
– One shall take extra risk only if one expects to be
compensated for extra return.
3. Cash flows are the source of value.
– Profit is an accounting concept designed to measure
a business’s performance over an interval of time.
– Cash flow is the amount of cash that can actually be
taken out of the business over this same interval.
4. Market prices reflect information.
– Investors respond to new information by buying and
selling their investments.
Business Finance
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Which source of finance?

1. To replace obsolete computer equipment (cost

Rs. 50,000)
2. Engro Ltd want to pay wages at the end of the
week but they have no money in their bank
account.
3. To open new offices in an area of
unemployment such as the North Punjab
4. To purchase a fleet of company cars for the
sales reps.
5. Five sources of finance that does not require
the paying back of any interest.

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Which sources of finance do
you think you will/will not use
in your business?

In pencil fill in the first section of

the sheet
 Match the advantages and
disadvantages to the sources
of finance you have picked

In pencil fill in the rest of the sheet

Source of Finance

1. What is finance?

2. Explain three reasons why a business might need finance?

3. What is the difference between internal and external finance?

4. Explain at least two sources of finance that would not be relevant to your
business?
• Give the advantages and disadvantages of each source of finance

• Explain why you could not use them for your business (Not a PLC)

5. Explain the sources of finance that you will use in your business?
• Explain the advantages and disadvantages of each source of finance

• What will you use each source of finance for (Mortgage = Premise)

***Remember to fully explain each source of finance you use***

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