Summary Sources of finance

Sources
SOURCES OF FINANCE /CAPITAL

These aredifferent ways a business can obtain money

• Sources of finance can be classified into:

1. Internal sources (raised from within the organization)

2. External (raised from an outside source)

Internal sources of finance include:
– Owner’s investment (start up or additional capital)
– Retained profits
– Reduction of stock
– Sale of fixed assets
– Debt collection

, Internal Sources
1.Owner’s investment

• This is money which comes from the owner’s own Advantages
savings • Doesn’t have to be repaid
• It may be in the form of start up capital - used when • No interest is payable
the business is setting up
Disadvantages
• It may be in the form of additional capital – perhaps
used for expansion • There is a limit to the amount an owner can invest internal
sources
• This is a long-term source of finance


2.Retained Profits
• This source of finance is only available for a business
which has been trading for more than one year Advantages

• It is when the profits made are ploughed back into
• Doesn’t have to be repaid
the business
• No interest is payable
• This is a medium or long- term source of finance
Disadvantages
• Not available to a new business
• Business may not make enough profit to plough back


3.Reduction of Stock

• This money comes in from selling off unsold stock
• The profits made are ploughed back into the business

• This is a short-term source of finance