Sources of finance

The following are sources of finance ie where a business may
get its money from.

Bank loans

Long term lending by a bank over a fixed period. Interest has
to be paid and usually requires security
(Security - i.e. a legal right given to the bank to take an
asset if the loan isn’t repaid)

A good way of getting funds enables the business to spread
the cost over a long period of time but interest has to be


The business offers to pay a fixed rate of interest over a set
period of time in exchange for money

A good way of getting finance but the interest rate may have
to be quite high to encourage lenders.

Debt factoring

The business sells to another business the unpaid invoices it
(Invoice – a bill!)
A good way of getting new business because the firm can
offer trade credit (see later) then sell the invoice to get the
money (but not all the value of the invoice will be paid).

Hire purchase

Renting a piece of equipment for a fixed period, after which
the business takes ownership.


Renting a piece of equipment from another business for a
fixed period of time.
Relatively cheap way of getting equipment without having to
spend the large amount purchase would require.


A bank loan on property. Very cheap, a business pays interest
on the loan plus the capital amount. Taken out over a very
long period of time, maybe up to 30 years.


An overdraft occurs when a business spends more money than
it has in its bank account. This is a very expensive way of
borrowing money and must only be done for very short
periods of time.


A ‘limited company’ can issue more shares. This is free of
interest but profit will have to be distributed in the form of a
‘dividend’ (an amount of profit per share). There is also
danger that the more shares there are the greater the
possibility of a shareholder revolt with shareholders taking
over the business or selling their shares to someone else.

Trade credit

Occurs when a business gets hold of supplies but don’t have
to apy for them for a set period of time e.g. 30 days credit.
A good way of getting supplies using them to make profit
before having to pay for them.

Retained profit

Profit saved form the previous years profits
The cheapest (free!) form of finance.