Sources of Funding for Business: Positives and Cons

Sources of Finance

Finance is vital for a business's, development and expansion. Fund is the key factor for some businesses and for that reason it is very important for businesses tomanage and keep maintaining their financial resources better. Fund is open to a small business from avariety of resources both inside and external. It is also critical for businesses to find the most appropriate way to obtain finance for its several needs as different resources have its benefits and costs. Sources of finance can be categorized based on a number of factors and the can be categorized as Internal and Exterior, Short-term and Long-term.

Identify the resources of finance open to a business

Working capital - owners discovering that are invested into business from the beginning to finance procedure. Liability will be created in form of capital.


  • Since it can be an inner source offinance there are no costs involved and no repayment is necessary.


  • Opportunity costs are involved.
  • Is not ideal forlong term assets.
  • Working capital cannot increase huge amounts of funds.
  • Total risk is performed by the business.
  • Using working capital as a source offinance will influence the current proportion of the business.

Bank Overdraft - occurs when money is withdrawn from the lender bill and the available balance moves below zero. There are different bank charges which are depending on the agreement.


  • This is an excellent way to hide the period between money moving away from and coming into a company.
  • If used in the short-term most commonly it is cheaper when compared to a mortgage.


  • Interest is repayable on the total amount overdrawn
  • Can be costly if used over a longer time of their time.

Mortgage - this is financing secured on property repaid in instalments over a long time around 25 years. The business will own the property once the last repayment has been made. This is a long-term way to obtain finance.


  • Business has the use of the property.
  • Payments are pass on over a time period which is wonderful for budgeting.
  • Once all payments are made the business enterprise will own the advantage.


  • This is an expensive method in comparison to buying with cash.
  • If business does not match repayments the house could be repossessed.

Bank loan - This is a fixed amount for a fixed small amount of time with set repayment. The eye on this loan can be expensive.


  • Set repayments are spread over a time period which is good for budgeting.


  • Can be costly credited to interest obligations.
  • Bank may necessitate security on the loan.

Hire purchase - occurs when buyer is spending money on things or items in fixed instalments with all the item.


  • Businesses can have the use as high as day equipment immediately
  • Payments are propagate over a time frame which is wonderful for budgeting
  • Once all payments are made the business will own the property.


  • This is an expensive method in comparison to buying with cash.

Trade Credit - it is a system that allows buying something now and paying notice. For most business trade credit it is essential for business to growth.


  • Business can sell the goods first and pay for them later
  • Good for cash flow
  • No interest charged if money is paid within arranged time.


  • Discount given for cash repayment would be lost
  • Businesses need to carefully deal with their cashflow to ensure they will have money available when the debt is due to be paid.

Government Grants - this organisations offer grants to businesses, both set up and new and normally there are a few conditions apply.


  • Don't need to be repaid.


  • Certain conditions may apply
  • Not all businesses may be entitled to grant.

Factoring - is a financial exchange occurring whereby an enterprise offers its accounts receivable to a third part at a discount.


  • A large proportion of money isreceived within a brief time-frame.
  • The sales ledger of the business can be outsourced to the factor.
  • The money choices from debtors are undertaken by the factoring company.
  • Helps a business tohave a even cash flow operation.
  • Non-recourse factoring helps to protect your client company from bad debts.


  • The business must pay hobbies and fees for the factor for its services.
  • The cost will be areduction on the business's profit margin.

Analyse the costs of different sources of finance

Working capital

  • Tangible cost: They do not have any costs as it owner money that'll be invested to get started on an enterprise.
  • Opportunity costs: Can have borrowed extra if the working capital is insufficient from relatives, friend.
  • Tax results: This can be repay when the revenue will go up.

Bank Overdraft

  • Tangible cost: Interest is a little higher than forbank lending options and interest rates are calculated on a regular basis. This is short-term and quick way to obtain fund which is not pay promptly extra and large interest charges will apply.
  • Opportunity costs: Could have borrowed from family or friend to avoid extra charges or to feel into debts.
  • Tax effects: It can be deducted when the business enterprise is increasing advantage.


  • Tangible cost: Interest levels apply as agreed in regular instalments over quite a while usually for 25 years.
  • Opportunity costs: Would have borrowed from family to enough time interest fees.
  • Tax results: The house will be possessed by the company if monthly premiums are not meet.

Bank loan

  • Tangible cost: Interest to be paid on the amount borrowed at agreed rate. Interest is usually set forshort term lending options, and long-term loans will often have a variable rate of interest. Interest levels are less than for lender overdrafts.
  • Opportunity costs: Would have borrowed cheaply from family members or friends.
  • Tax results: Interest is tax deductible from income before we arrive at profit shape for tax goal.

Hire purchase

  • Tangible cost: The business enterprise ends up paying more than the initial value of the property because of its purchase and the eye has been paid in equal instalments.
  • Opportunity costs:
  • Tax results: Interest charges can be offset against revenue for taxation.

Trade Credit

  • Tangible cost: If paid on time there is absolutely no financial cost included, however if not paid on time the interest will apply automatically.
  • Opportunity costs: Working capital and friends.
  • Tax results: own possession of goods can be removed by the debt organisation or sale or rent to protect the interest cost.

Government Grants

  • Tangible cost: Government grants are free and have nofinancial costs.
  • Opportunity costs: May have borrowed from relatives or good friend as there are no legal agreements involved.
  • Tax results: No financial costs are involved.


  • Tangible cost: The business enterprise must pay interests and fees for the factor for its services the interest rates are calculated on the dailybasis, credit management and administrative cost are also chargedand amounts.
  • Opportunity costs: Working Capital will be a better alternative or relatives and friends.
  • Tax effects: The business enterprise must pay passions and fees for the factor for its services and the price will be areduction on the company's profit percentage.

Evaluate appropriate resources of finance for a company project

There are several sources of finance open to a company on the marketplace. Finances are needed for many and various purposes need sources offinance that happen to be most suitable. When choosing a best suited source of financing some conditions have to be considered. The conditions that require tobe considered when choosing an appropriate way to obtain finance are:

  • The sum of money needed
  • The urgency of funds
  • The cost of way to obtain finance
  • The risk involved
  • The length of finance
  • The gearing proportion of thebusiness
  • The control of the business


Hair and Beauty Business Project

"Ideas" aims should be the first cosmetic salon in the local area that may deliver unique and quality service by offering high standard cosmetics which will quickly gain market show.

"Inspiration" will provide customers with a relaxing and comforting atmosphere which can only help them to enjoy the service provided to gained high reputation.

  • Building - Home loan - long term which will be payable for 25 years.
  • Personnel - Bank Loan - small amount of time with predetermined repayment 3-5 years.
  • Furniture and stationary etc. - Working Capital - owners discovering that are spent into business.
  • Brochures - Overdraft - short-term it is usually cheaper when compared to a bank loan.
  • Advertisement - Bank Loan - Set payments, spread over a period of time, interest high.
  • Others - Family members or friends.

These loans will be paid from the cash flow from the business and you will be collateralized by the property of the company on short-term or long-term agreements with the lenders.

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