Sources of Finance for a Business
For a business to successfully run, it must have sources of finance.
These are methods of financing the running of the business, buying of
stock and paying of workers. Small businesses and large businesses
have different sources of finance. In this section, I will discuss the
different sources of finance used by small and large businesses, and
the advantages and disadvantages of each, starting with small
Setting up a business costs money. For instance, setting up a bakery
involves buying or renting a shop and buying stocks of flour and so
on. One source of finance for a new business is equity or equity
capital. This is money which is put into the business by its owners.
The baker for instance, may have savings of £20,000 which are used to
buy a lease on a shop and start a sole proprietorship. They may also
go into a partnership with another person, with each putting in
£10,000 of their own savings. The advantage of using equity capital is
that, as it is the owner’s money, no extra cost or interest is charged
when using it. The problem with equity capital is that it is difficult
to gather in the first place. It is often difficult for small and
medium sized businesses to find individuals to provide equity. Or, if
the business is a sole proprietorship, the owner may be short of money
to provide equity. Retained profit is also the most important source
of finance for large businesses in the UK.
Once the business has been set up, it will want to make a profit. This
profit is owned by the owners of the business. Retained or
undistributed profit is where these profits are kept back for use
within the business. These might be used to buy another store and
grow, or buy more stocks. Using retained profit has one advantage over
borrowing money because the business doesn’t have to make payments on
the money that is retained. It does not have to be repaid, so no
interest or dividends are due on it. However, a problem with retained
profit is that it has to be accumulated, which takes a long time. A
business must be successful to have a profit, especially to make
enough where they can afford to retain some.
Many new businesses borrow money in order to start. As they continue
trading, they may need to borrow more money to survive or expand.
Banks are the main source of loans for small businesses. With a bank
loan, the business usually borrows a fixed amount of money. It will
then pay this back in regular fixed instalments. These repayments
include the interest on the outstanding money owed. The bank may ask
for security or collateral on the loan, which means that the business
must pledge assets to the bank. The bank can sell these assets if the
business cannot repay the loan. The most common type of security is
property, for example a...