Good morning, class! Today we are going to talk about a very important topic in Business Studies — sources of finance. Every business needs money to operate, whether it’s to start up, expand, buy new equipment, or manage day-to-day expenses. These sources of finance are divided into two main categories: internal and external. Internal finance comes from within the business, while external finance comes from outside sources like banks or investors. Understanding these helps businesses make smart financial decisions.
Let’s start with internal sources of finance. Internal finance means the money that a business raises from its own resources. The biggest advantage of internal finance is that it does not involve borrowing or paying interest, which makes it cheaper and safer for a business, especially when it is new or small. The first internal source is Owner’s Investment. This is when the owner uses their own savings to fund the business. For example, if someone opens a small café using personal savings, that is an owner’s investment. It shows commitment and increases the owner’s share in the business.
The second source is Retained Earnings, also known as retained profits. This is when a business keeps some of its profits instead of paying them out as dividends to shareholders. For instance, a company that made a profit last year may reinvest part of that money to buy new machinery or open another branch. This is a very sustainable way of financing because it doesn’t increase debt. Another source is the Sale of Unwanted Assets. If a business owns equipment, land, or vehicles that are no longer needed, selling them can provide quick cash for other purposes.
Another clever method is Sale and Leaseback. Here, the business sells a non-current asset, such as a building, to another company and then leases it back for use. This improves cash flow because the business gets money from the sale but continues using the asset. Lastly, Working Capital Management is also an internal source. By collecting payments from customers faster or delaying payments to suppliers, businesses can free up cash for short-term needs.
Now let’s move to external sources of finance. These are funds that come from outside the business, often through borrowing or investment. They are especially useful when a business wants to expand or needs a large amount of money. The most common source is Share Capital. This is when a company issues shares to investors in exchange for money. For example, large companies like Coca-Cola or Unilever raise funds by selling shares. The advantage is that the company does not have to repay the money, but it may lose some control because shareholders get voting rights.
Another common source is Debentures, which are long-term loans issued by companies at a fixed interest rate. These must be repaid after a certain time and are often secured against company assets. Partnerships can also raise finance by introducing New Partners, who bring in extra capital, skills, and ideas. Then we have Venture Capital, which comes from investors who are willing to take a risk by investing in new and fast-growing businesses in return for a share of ownership. For example, many technology start-ups receive venture capital funding to expand quickly.
There are also short-term sources of external finance such as Bank Overdrafts. This allows a business to withdraw more money than it has in its account, which helps during temporary cash shortages. However, overdrafts can be expensive if used for too long. Leasing is another helpful method. It allows businesses to use equipment, such as computers or vehicles, by paying monthly installments instead of buying them outright. This keeps the business’s cash free for other uses. Similarly, Hire Purchase allows a business to buy assets through installments and gain ownership once the final payment is made.
Businesses also rely on Bank Loans, which are borrowed for a fixed period with regular interest payments. These are suitable for long-term investments like buying machinery or expanding premises. When the loan is specifically for buying land or property, it is called a Mortgage. Another useful option is Debt Factoring, where a business sells its unpaid invoices to another company for immediate cash. Although it provides instant money, the business receives slightly less than the full amount.
Trade Credit is also a common short-term source. Suppliers allow businesses to buy goods now and pay later, often within 30 or 60 days. This helps with cash flow management. Microfinance is especially important in developing economies. It provides small loans to entrepreneurs who cannot access traditional banks. For example, someone starting a tailoring or food stall business might use microfinance. In modern times, Crowdfunding has become popular too. Here, many people contribute small amounts through online platforms to support a business idea. Lastly, Government Grants provide financial assistance to businesses for projects like innovation or environmental improvements. These funds do not need to be repaid but often come with strict conditions.
To conclude, choosing between internal and external sources of finance depends on the business’s size, goals, and financial situation. Internal finance is usually cheaper and safer but limited, while external finance provides larger sums but might include interest costs or loss of control.
