2.2+Sources+of+Finance

=Capital Needs=

Businesses need funds for long and short-term purposes. Short-term:
 * Electricity, water, employees' wages, bills, supplies, insurance, raw materials and any other regular payments

These short-term funds are called WORKING CAPITAL.

Long-term:
 * Funds required to purchase a major asset, i.e. land, buildings, machinery and other permanent assets

Sources to obtain the finance:

 * Internal** - Sources of finance available from inside the company

1 - Owner's funds An owner investing capital in a buiness gives more confidence in it. Additional owner's funds (capital) come from ongoing profits put back into the business. This is called retained profit.

2 - Sale of assets Things that you don't require any more can be sold off. For example, a van, old PCs or furtniture.


 * External** - finance availabe to the business from outside of the company

1 - Loans A loan is usually from a financial institution (bank), whereby money is lent and the borrower repays back over time, with added interest. These can be for months or even years. It is more difficult to secure a loan at the start-up stage - higher risk.

2 - Mortgage A long-term method of finance; it is given by a bank to purchase a property. The loan is secured against the property.If you fail to make repayments, you can lose the property.

3 - Short- term finance Trade credit, you can take the good and pay at a later date. There is a period of trade credit (1 month, 3 months or longer). Many small businesses use a credit card for short-term bills. The longer it takes to repay a credit card the more interest is charged.

An overdraft is a facility where you can spend more than is in your bank, up to a certain point.