Unit 3: business finance
TASK 1: Explore types of business finance available at different stages in the growth of
a business
P1: Explain sources and suitability of finance available in different business contexts.
P2: Explain sources and suitability of revenue available in a specific business context.
M1: Analyse the types of business finance required in a specific business context.
D1: Evaluate appropriate types of business finance applicable in a specific business
context.
Starting and funding a business from scratch can be a difficult task and requires sources of
finance. These sources of finances can be divided into two parts: Internal finance and
External finance. Internal sources of finance come from within the business. These sources
include the owner’s personal capital, sale of owned/personal assets and retained profit which
comes from the sale of goods.
Whereas External finance is a source of finance which comes from outside the business.
These sources include mortgages, debentures, loans, leasing, crowdfunding, overdrafts,
invoice discounting, debt factoring, among many available sources. These sources can be
further divided based on the length of the financing. For example, crowdfunding and
overdrafts are considered short-terms options. A bank loan and leasing are considered
medium-term source of finance. Whereas, sale of shares, debentures or mortgages is
considered a long-term source of finance.
Ahmed’s internal sources of financing are very limited. He does not have the personal capital
as indicated by his intention of mortgaging the house. He cannot sell the house as he lives in
it and neither is there an option of retained profit as Ahmed has not started the business yet.
Therefore, Ahmed has to rely mainly on external sources of finance.
In terms of short-term financing, Ahmed cannot choose bank overdrafts as this type of
financing is used for small projects as the funding is low. Regarding invoice discounting and
trade credit, this type of financing requires strong relations with the suppliers. Ahmed is yet
to start his business so there will be lack of strong supplier relationships. However, Ahmed
can choose crowdfunding to fund his start-up. Ahmed can propose his ideas to investors who
can invest small amounts if interested. Small amounts from various investors will be effective
in starting Ahmed’s business.
Regarding the medium-term source of finance, Ahmed can take out a loan from the bank.
Banks lend money to businesses with a solid business proposal and plan. Venture capital is
not a solid option as this group of investors invest in unique ideas such specifically related to
the technical field. Leasing is also not an effective option as Ahmed does not want to rent his
house but instead requires funds to start his business.
In addition, Ahmed can also rely on long-term external sources of financing. Ahmed has a
house which he can mortgage which will lead to a healthy long-term source of income. A
company could also sell stocks to raise finance from an external source, however, Ahmed’s
TASK 1: Explore types of business finance available at different stages in the growth of
a business
P1: Explain sources and suitability of finance available in different business contexts.
P2: Explain sources and suitability of revenue available in a specific business context.
M1: Analyse the types of business finance required in a specific business context.
D1: Evaluate appropriate types of business finance applicable in a specific business
context.
Starting and funding a business from scratch can be a difficult task and requires sources of
finance. These sources of finances can be divided into two parts: Internal finance and
External finance. Internal sources of finance come from within the business. These sources
include the owner’s personal capital, sale of owned/personal assets and retained profit which
comes from the sale of goods.
Whereas External finance is a source of finance which comes from outside the business.
These sources include mortgages, debentures, loans, leasing, crowdfunding, overdrafts,
invoice discounting, debt factoring, among many available sources. These sources can be
further divided based on the length of the financing. For example, crowdfunding and
overdrafts are considered short-terms options. A bank loan and leasing are considered
medium-term source of finance. Whereas, sale of shares, debentures or mortgages is
considered a long-term source of finance.
Ahmed’s internal sources of financing are very limited. He does not have the personal capital
as indicated by his intention of mortgaging the house. He cannot sell the house as he lives in
it and neither is there an option of retained profit as Ahmed has not started the business yet.
Therefore, Ahmed has to rely mainly on external sources of finance.
In terms of short-term financing, Ahmed cannot choose bank overdrafts as this type of
financing is used for small projects as the funding is low. Regarding invoice discounting and
trade credit, this type of financing requires strong relations with the suppliers. Ahmed is yet
to start his business so there will be lack of strong supplier relationships. However, Ahmed
can choose crowdfunding to fund his start-up. Ahmed can propose his ideas to investors who
can invest small amounts if interested. Small amounts from various investors will be effective
in starting Ahmed’s business.
Regarding the medium-term source of finance, Ahmed can take out a loan from the bank.
Banks lend money to businesses with a solid business proposal and plan. Venture capital is
not a solid option as this group of investors invest in unique ideas such specifically related to
the technical field. Leasing is also not an effective option as Ahmed does not want to rent his
house but instead requires funds to start his business.
In addition, Ahmed can also rely on long-term external sources of financing. Ahmed has a
house which he can mortgage which will lead to a healthy long-term source of income. A
company could also sell stocks to raise finance from an external source, however, Ahmed’s
