Sources of Finance in Business Management

Overview of Course

• Importance of learning sources of finance in business management.
• Three main categories:
  • Internal sources of finance
  • External sources of finance
  • Short-term and long-term sources of finance
• Assessment Objectives:
  • AO2: Analyze internal and external sources of finance.
  • AO3: Evaluate and justify the appropriateness of different sources.

Internal Sources of Finance

• Personal Funds
  • Definition: Personal savings or money from family/friends.
  • Pros: No interest, full control.
  • Cons: Often insufficient, risk of losing personal savings.
  • Best for: Unlimited liability businesses (sole traders, partnerships).
• Retained Profits
  • Definition: Profits retained in the business.
  • Pros: No interest, full control.
  • Cons: Not applicable for startups, might upset shareholders if dividends are not paid.
  • Best for: Companies with substantial retained earnings without upsetting shareholders.
• Sale of Assets
  • Definition: Selling business's assets for cash.
  • Pros: No interest, full control.
  • Cons: Limited by available assets, time-consuming to sell.
  • Best for: Businesses relocating or closing some parts.

External Sources of Finance

• Share Capital
  • Definition: Money raised from selling shares.
  • Pros: Large sums, no interest.
  • Cons: Bureaucratic, potential loss of control, need to pay dividends.
  • Best for: Limited liability companies with controlled ownership.
• Loan Capital
  • Definition: Borrowing money from banks/financial institutions.
  • Pros: No loss of control.
  • Cons: Interest payments, collateral required.
  • Best for: Needs large sums with repayment ability.
• Overdrafts
  • Definition: Agreement with bank to spend more than account balance.
  • Pros: Easy to acquire, no collateral needed.
  • Cons: High interest rates.
  • Best for: Short-term cash flow issues.
• Trade Credit
  • Definition: Buy now, pay later arrangement with suppliers.
  • Pros: Immediate supply without immediate payment.
  • Cons: No discounts, full or higher prices.
  • Best for: Strong supplier relationships.
• Crowdfunding
  • Definition: Raising small amounts from many people online.
  • Pros: No interest, community support.
  • Cons: Commission fees, platform rules.
  • Best for: Unique small business ideas.
• Leasing
  • Definition: Renting assets rather than buying.
  • Pros: No maintenance costs, lower taxes.
  • Cons: Never own the asset.
  • Best for: Short-term equipment needs.
• Microfinance
  • Definition: Small loans from microfinance institutions.
  • Pros: Helps poverty alleviation, no collateral.
  • Cons: High interest rates.
  • Best for: Small businesses in less developed areas.
• Business Angels
  • Definition: Wealthy individuals investing in startups.
  • Pros: No interest.
  • Cons: Potential loss of control.
  • Best for: High-growth potential businesses.

Short-term vs. Long-term Sources of Finance

• Short-term (≤ 1 year)
  • Examples: Overdrafts, trade credit, short-term loans.
• Long-term (> 1 year)
  • Examples: Share capital, loan capital, leasing.

Evaluating Appropriateness

• Consider factors like availability, cost, control, time, gearing, and risk.
• Utilize common sense and gut feeling for judgment.

Other Notes

• Distinction between sources of finance and revenue streams.
• Importance of understanding these concepts for business management success.

---

• Conclusion:
  • Review assessment objectives and ensure understanding.
  • Engage with course materials for a comprehensive understanding.
  • Seek help if concepts are unclear.

---