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