IGCSE Business Studies: Sources of finance

Bank loans

A sum of money obtained from a bank which must be repaid and on which interest is payable

Hire purchase

Allows a business to buy a fixed asset over a long period of time with monthly payments which include an interest charge

Leasing

Allows the firm to use an asset (e.g. new machines) but does not have to purchase it. It will always have the latest model to use.

Sale of fixed assets

Existing assets that are sold, usually items of value which are no longer required by the business

Internal sources of finance

Funds found inside the business. For example, profits can be kept back to finance expansion or the business can sell assets.

External sources of finance

Funds found outside the business, eg from creditors or banks.

Criteria for choosing a source of finance

Long term or short term Amount of money needed Cost of borrowing

Debentures

Long-term loan certificates issued by limited companies

Short term finance

Overdraft Trade credit Debt factoring Reduce stock

Retained profit

Profit kept in the business after the owners have taken their share of the profits; aka ploughed-back profit

Microfinance

Providing financial services - including small loans - to poor people not served by traditional banks

Reduce stock levels

Sell off the existing inventory (stock) to raise cash.

Debt factoring

Selling debts for immediate cash to specialist agencies that then chase the debt themselves

Issue of shares (share issues)

Selling of shares in order to raise finance

Long term finance

Share issue Debentures Higher purchase Leasing

Grants and subsidies

Usually given by Government, do not have to be repaid

Overdraft

When a bank allows a firm to withdraw more money than it currently has in its account because it is short of cash to pay wages or creditors.

Trade credit

When a business delays paying its suppliers, leaving the business in a better cash position