SOURCES OF FINANCE

SOURCES OF FINANCE

• ​Understand why businesses need finance

• ​Understand and explain the internal sources of finance

• ​Understand and explain the external sources of finance

​Learning Objectives:

Open Ended

Do Now Activity

Give three reasons why a business might need money. (3 marks)

Getting Sta​rted

Money is needed to set up a business and to keep it running. It is also needed to help a business expand.​

A business might need money : 

​

• ​For set-up/start up

• ​To keep it running

• ​For expansion

​Finance is the broad term for funds that are used for business activities, making purchases or investing.

​Simply put, a business' need for finance can be categorized into three: 

​

• ​Short-term needs

• ​long-term needs

• ​To start up or expand

Open Ended

State three short term needs of a school. (3 marks)

Open Ended

State three long term needs of a b. (3 marks)

​Start-up capital

Funds are most needed when first setting up a business. This is because a lot of resources are needed before trading can begin. Some of these resources are ​'one-off' items. For example, a new restaurant would need to buy cookers, refrigerators, utensils, furniture, glassware and other equipment including knives, forks and plates. Once these 'one-off' costs have been met, they may not be repeated for many years. Other start-up costs might include research, converting premises, legal fees, website design and marketing.

Open Ended

Give a short definition of the 'short-term finance'.

​Short term finance

​This is money borrowed for one year or less.

Multiple Choice

Which of these is a short-term source of finance?

• mortgage

• share capital

• venture capital

• bank overdraft

​Long term Finance

​Money borrowed for more than one year. Long-term sources of finance are often used to buy resources that will be used repeatedly by the business for long period of time.

​Expansion

​ Once a business is established, the owners often want to expand. They may want to:

​

• ​expand capacity to meet growing orders

• ​develop new products

• ​branch into overseas markets

• ​diversify

​Recap

• ​Short-term finance is money borrowed for one year or less.

• ​Long-term finance is money borrowed for more than one year.

• ​Start-up capital are funds that are most needed when first setting up a business.

Multiple Choice

Which of these sources of finance is internal?

• retained profit

• mortgage

• venture capital

• crowdfunding

​

Businesses might source for funds internally or externally.

​Internal Sources of Finance

​Come from inside the business and can only be used when the business is established. This is because new businesses are usually short of finance. There are three main sources of finance.

​

• ​Personal savings

• ​retained profit

• ​selling assets

​External Sources of Finance

​Come from outside the business. There is a wide variety of both short-term and long-term external sources of finance. Short-term sources, where money is borrowed for less than one year, may be needed for:

​

​-seasonal trading

​-paying for raw material sand wages to meet a large order

​-to meet emergency expenditure.

Multiple Choice

Trade payables is a suitable source of finance to fund the purchase of what?

• a new delivery vehicle

• inventories

• property

• direct labour

Multiple Choice

A rights issue involves the sale of what?

• new shares on the stock market

• fixed assets

• new shares to existing shareholders

• part of the business

Google Docs - create and edit documents online, for free.

You can open this webpage in a new tab.

Copy link

Open in new tab