23/05/23

What are the different sources

of finance?
Learning Outcomes

Identify and describe different sources of

finance
Explain which source of finance is
appropriate in a given context
Analyse the advantages and disadvantages
of different sources of finance
Why do businesses need finance?

Working with those around you,

make a list of the many reasons
why businesses would need to
raise finance?
 How many sources of finance can you
think of?
• Where do you think businesses get ‘money’
from/ how can they generate it?

• Create the list on your own – how many can

you think of?

• Now compare lists with the people around

you – now how many can you think of?
 Capital expenditure
• Capital expenditure is money spent to acquire
items in a business that will last more than a year
and may be used over and over again.
• E.g. the purchase of a vehicle. (FIXED ASSETS)

These fixed assets are needed for the purpose of generating

income for the business over the longer term. Due to their
high initial cost, most fixed assets can be used as
collateral. Therefore capital expenditure items are longer
term investments.
 Revenue expenditure
• Revenue expenditure is money spent on the
day-to-day running of the business
• E.g. wages & utility bills.

These payments do not involve the purchase of

longer term, fixed assets. The revenue
expenditure needs to be covered immediately to
keep the business operational and should
therefore provide immediate benefits.
 Internal vs. External
Where the business obtains its finance can be:

INTERNAL (from within the business)

•Retained profit.
OR
EXTERNAL (from outside the business).
•Bank loan.
Internal & external sources of finance
Internal External
Personal (owners’) funds Share capital
Retained profit Loan capital
Sale of assets Overdrafts
Trade credit
Grants
Subsidies
Debt factoring
Leasing
Venture capital
Business angels
Short-, medium- and long-term finance
It is important that the type of finance be matched with its
use/purpose. (LT ASSET = LT FINANCE).
•Short-term finance – this provides working capital and
provides finance for the day-to-day expenses of the business.
It is expected that these will be paid back within 12 months.
•Medium-term finance – this is mostly used to purchase assets
such as equipment or vehicles that have lifespans of between
1 to 5 years.
•Long-term finance – this is used to fund long-term fixed assets
from anywhere between 5 to 30 years.
 Factors influencing the choice of a
source of finance
• Purpose or use of funds
• Costs (associated with obtaining the funds)
• Status and size (of the business)
• Amount required
• Flexibility (the ability to switch from one source to
another)
• State of the external environment (recession etc)
• Gearing (the proportion of loan capital compared to
share capital)
 Become an expert advisor
• You will be given a source of finance to find out about.
• You must become experts in this source of finance as you will
have to give advice to business owners in the second part of
the activity.
• You will therefore need to know the advantages and
disadvantages and be able to recommend whether your
source of finance should be used in a given context.
Sale of assets Lease back (asset
sold and then leased
back)
Overdraft
Share capital
Retained Profit Trade Credit
Leasing
Hire Purchase
Grants & subsidies
Venture capitalists
Loan capital and business angels

Debt Factoring
Personal Funds
 Business Situation
• You will now be given a business situation (e.g. sole
trader requiring a new van) and take part in a
carousel activity.

• You will be paired with someone who will tell you

about a source of finance and you should consider if it
would be suitable for your situation.

• You will then take the role of the advisor and inform
your partner of the source of finance you looked at.

• Then do the same again with another member of the

group.
You want to set up a small café selling organic and
fair trade food and drink.
You are a medium-scale manufacturing company
and need some new equipment to keep up with
your competitors.
You are a gardener and are a sole trader and need
a new van.
You are a large multi national company and wish
to set up a new manufacturing base abroad.
You are a large chain supermarket and wish to
open a new store.
You have set up as a small manufacturing
business and require supplies to make your arts
and crafts.
You have come up with a new innovative idea for a
product and are looking for someone to invest in
your product idea.
You want to open a small music shop and need to
raise finance to start your business.
You need some new equipment for your window
cleaning business.
quizlet review quiz
• Students must reflect on the sources of
finance they have found out about and decide
which would be the most suitable method for
their situation.
• Students will need to consider advantages and
disadvantages and make a recommendation.
Through this they can refer to the outcomes
to review their own progress in the lesson.