- Finance is needed throughout a company's life. The type and amount of finance required for a business depends on many factors: type of business, success of firm and state of the economy. There are two main types of money that a company needs.
- Capital expenditure: Used for buying fixed assets where large sums of money are involved but they are not purchased often e.g. new premises.
- Working capital: Day to day money required for running the business.
- There are two main sources of finance, these are internal sources and external sources.
Internal sources include:
- Retained profit - profit made is reinvested into the business.
- Controlling working capital - reducing costs, delaying outflows and speeding up inflows.
- Sale of assets - Assets the company owns can be sold and then leased back which frees up a large amount of capital in the short term.
External sources of finance:
- Increasing trade credit - delaying payments on purchases for as long as possible.
- Factoring - use a company to collect all debts.
- Overdraft - an agreement with a bank to be allowed to overdraw a certain amount.
- Grants - an agreed amount of money given for a special reason by government or other organisation.
- Venture capital - people invest in the company when it is unable to float on the stock market.
- Debentures - business equivalent of a mortgage. Loan for a set length of time at a set interest rate.
- Share issues - selling of new shares to raise capital.
- Owners savings - the owners investing money into the business.
- Bank loans - medium or long term loans but interest is charged.
- Leasing - instead of buying.