Sources of finance

sources of finance available to a business

A business might have access to various sources of financing its needs. These sources of finance can be classified as:

Internal and external

Internal: this is money raised from inside the business. It includes

  • Sales of assets: Business might sell off old, obsolete assets which are no longer used by the business to raise additional cash for the business.

Advantage

Disadvantage

Better use of capital

A new business might not have any old or obsolete assets

  • Retained profits : Businesses (especially limited companies) usually keep some part of the profit every year for future use. This is also known as ploughed back profit. Over a period of time it can total up to a huge amount which can be used for financing the business.

Advantage

Disadvantage

Does not increase liabilities
No need to pay interest

Not available to new businesses

  • Reduction in working capital: Cutting the stock levels can also help the business to raise additional cash.

Advantage

Disadvantage

Costs related to storage of stock is reduced

May lead to shortage of stock and loss of sales


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