SOURCES OF FINANCE

part 1

1. Why Businesses Need Finance

Finance is essential for various business activities, including:

  • Start-up Capital – Needed to launch a business (buying equipment, premises).
  • Working Capital – Day-to-day expenses (wages, bills, stock).
  • Expansion – Funding for growth, purchasing assets, or increasing production.
  • Acquisitions – Buying other businesses requires significant capital.
  • Emergency Funds – Covering unexpected costs (e.g., economic downturns).
  • R&D & Marketing – Investing in new products or entering new markets.

Finance needs vary in duration:

  • Short-term – Less than a year (e.g., working capital).
  • Medium-term – 1-5 years (e.g., asset purchase).
  • Long-term – More than five years (e.g., business expansion).

2. Types of Expenditure

  • Capital Expenditure – Investment in long-term assets (e.g., buildings, machinery).
  • Revenue Expenditure – Day-to-day operational costs (e.g., wages, stock).

3. Sources of Finance

Finance can come from internal or external sources.

Internal Sources
  • Retained Profits – Profits reinvested into the business (permanent, but limited).
  • Sale of Assets – Selling unused assets to raise cash (can lead to leasing costs).
  • Reducing Working Capital – Lowering stock levels or collecting debts faster (risky if liquidity drops).
External Sources

Short-term finance:

  • Bank Overdrafts – Flexible borrowing but high interest.
  • Trade Credit – Delayed payments to suppliers.
  • Factoring – Selling unpaid invoices to a financial company for quick cash.

Medium-term finance:

  • Leasing & Hire Purchase – Using assets without full ownership.
  • Medium-term Loans – Borrowed funds repaid over 1-5 years.

Long-term finance:

  • Share Capital (Equity Finance) – Selling shares (only for limited companies).
  • Debentures – Long-term bonds issued to investors.
  • Bank Loans – Fixed borrowing over many years.
  • Grants – Government or institutional funding (often with conditions).

Conclusion

Businesses require finance for various reasons, and choosing the right source depends on factors like cost,

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