Business Finance: Needs And Sources: The Main Sources Of Finance (Copy)
Cheat Sheet: 5.1.2 Main Sources of Finance
Internal Sources of Finance
| Source | Explanation | Example |
|---|---|---|
| Retained Profit | Profits reinvested instead of distributed | Tech firm reinvesting earnings in R&D |
| Sale of Assets | Selling unwanted property/equipment | Selling unused warehouse |
| Owner’s Own Capital | Personal funds invested into business | Sole trader investing savings |
Written and Compiled By Sir Hunain Zia, World Record Holder With 154 Total A Grades, 7 Distinctions and 11 World Records For Educate A Change O Level And IGCSE Business Studies Full Scale Course
External Sources of Finance
| Source | Short-term / Long-term | Explanation | Example |
|---|---|---|---|
| Overdraft | Short-term | Bank allows business to withdraw more than balance | Cover temporary cash shortage |
| Trade Credit | Short-term | Delay in paying suppliers | Pay 60 days later |
| Bank Loan | Long-term | Borrow lump sum, repay with interest | Buy machinery |
| Mortgage | Long-term | Loan secured on property | Buying factory building |
| Debentures | Long-term | Bonds issued to raise finance | Large companies raising capital |
| Share Issue | Long-term | Selling ownership shares | Public limited company issuing equity |
Alternative Sources
| Source | Explanation | Example |
|---|---|---|
| Microfinance | Small loans to poor entrepreneurs | Village women financing sewing machines |
| Crowdfunding | Raising finance from many small investors online | Kickstarter project for a new gadget |
Written and Compiled By Sir Hunain Zia, World Record Holder With 154 Total A Grades, 7 Distinctions and 11 World Records For Educate A Change O Level And IGCSE Business Studies Full Scale Course
Factors Influencing Choice of Finance
| Factor | Impact |
|---|---|
| Size & Legal Form | PLCs can issue shares; sole traders cannot |
| Amount Required | Small = overdraft; Large = share issue or debentures |
| Duration | Short-term needs → overdraft; Long-term → loan/mortgage |
| Cost of Finance | Interest rates, dividends, issue costs |
| Existing Loans | Too much debt may block further borrowing |
| Risk & Control | Equity dilutes ownership, debt increases risk |
Recommending Sources – Examples
| Situation | Best Source | Justification |
|---|---|---|
| Sole trader needing $2000 for stock | Overdraft/Trade credit | Short-term, flexible |
| Large company building new factory | Mortgage or debentures | Long-term, large amount |
| Startup with innovative idea | Crowdfunding | Access to capital + builds customer base |
| Poor entrepreneur in rural area | Microfinance | Provides access where banks won’t lend |
Written and Compiled By Sir Hunain Zia, World Record Holder With 154 Total A Grades, 7 Distinctions and 11 World Records For Educate A Change O Level And IGCSE Business Studies Full Scale Course
Quick Revision Bullets
- Internal sources = retained profit, sale of assets, owner’s savings
- External sources = overdraft, trade credit, bank loans, mortgages, debentures, shares
- Alternative sources = microfinance, crowdfunding
- Choice depends on amount, duration, business size/legal form, existing loans
- Always match source to circumstance for best outcome
Written and Compiled By Sir Hunain Zia, World Record Holder With 154 Total A Grades, 7 Distinctions and 11 World Records For Educate A Change O Level And IGCSE Business Studies Full Scale Course