Sources of Finance

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Sources of finance

What are the main sources and finance for UK firms and why?

All firms need some kind of financing. Access to finance may differ considerably from firm to firm depending on what type of business they are and how big/known they are; Sole Trader, Public Limited or Private Limited Company.

There are both INTERNAL and EXTERNAL sources of finance. Finance can be short, medium or long term.

Internal sources of Finance: 2 main types
1) Funds from the owner(s) and the family. These funds are normally savings and other money invested as capital. ✓ Funds from the family can take the form of a loan provided at a low or nil rate of interest. This form of financing is quite cheap. ✓ Also it can be very valuable when the business is starting up or relatively new and there are no profits to call upon 2) Funds generated from profits or retained earnings.

✓ These are useful as they do not attract any interest charge ✓ It is helpful when the business has been up and running for a while and wishes to expand and needs a cheap source of financing.

There are some disadvantages to relying on internal sources of finance. ➢ For example funds from the owner may be limited in supply ➢ Family members may want their loan paying unexpectedly ➢ Family members may want to have a say in how the business is run

External sources of Finance:
1) Business Angels: this is a wealthy individual (often and active or retired entrepreneur) who provides finance for a business and in return takes a percentage stake in the business and helps to run it. 2) Private equity finance: this is provided by an independent firm to private limited companies. In return, the private equity company receives shares in the private limited company and an active role in helping to run it 3) Bank loans

❖ Business Angels and private equity companies are different from a bank loan, as they have an active role in running the business and...
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