Sources of Finance

• Internal sources of finance include personal savings, retained profit, and sale of assets.
• Personal savings or owner’s capital is when the owner invests their own money into the business.
• Retained profit refers to reinvesting previous year’s earnings into the business.
• Selling assets can provide a quick source of cash, but it means losing the asset’s productive value.
• External sources of finance include borrowing from family and friends, banks, and peer-to-peer funding.
• Borrowing from family and friends can be easier but limited in funds and may strain personal relationships.
• Banks offer loans and overdrafts, but collateral and interest payments are required.
• Peer-to-peer funding matches lenders and borrowers directly, potentially offering better deals.
• Leasing and trade credit are other options for businesses to borrow money or manage cash flow.
• Business angels provide finance and expertise in return for ownership stake.
• Crowdfunding can be a challenging but innovative way to raise finance.
• Issuing shares to the public is a common source of finance, but it dilutes control and may require dividend payments.

This module discusses the various sources of finance available to businesses, both for start-ups and for growth and expansion. Internal sources of finance include personal savings, retained profit, and the sale of assets. External sources of finance include borrowing from family and friends, bank loans, overdrafts, peer-to-peer funding, leasing, and trade credit. Each source has its advantages and disadvantages, such as control, interest payments, collateral requirements, and potential risks. It is important for businesses to carefully consider their funding options to ensure financial stability and growth.

Business angels and crowdfunding are external sources of finance that entrepreneurs can consider for their businesses. Business angels provide funding in exchange for a stake in ownership and bring expertise and a willingness to take risks. Crowdfunding involves persuading many people to contribute small amounts of money towards the business. Government grants are another option, but they can be difficult to access. Issuing shares to the public is a common source of finance, but it dilutes control and may require paying dividends. Overall, entrepreneurs need to carefully consider the pros and cons of each external source of finance before making a decision.