Sources of Business Finance

Where does the money come from?

Starting and growing a business takes money. That money is called a source of finance, and there are many to choose from. Some are short-term, for a quick cash gap; others are long-term, for lasting investment. This module sorts them out and matches each to the right situation.

The language of finance

Four ideas run through this module:

Short-term and long-term

Sources of finance split into two families, depending on how long the money is needed.

Match each source to its meaning

Spot the short-term source

Which of these is a SHORT-TERM source of finance?

• An overdraft
• A ten-year bank loan
• Share capital
• Retained profit

Bringing in outside money

For bigger, long-term needs a business can look outside. A bank loan is borrowed and repaid with interest over several years. Venture capital is money from an investor in return for a share of the business, often with advice too. Share capital is raised by selling shares. Crowdfunding gathers small amounts from many people online.

Match each long-term source

Spot the long-term sources

Select the TWO LONG-TERM sources of finance.

• A bank loan
• Retained profit
• An overdraft
• Trade credit

Finance in words

Money a business gets to start or grow is a _____ of finance. An _____ is short-term borrowing from a bank. Buying now and paying the supplier later is _____ credit. A bank _____ is repaid over years with interest. Profit kept back and reinvested is called _____ profit.

How to choose a source

Put the steps for choosing a source of finance into a sensible order.

• Work out how much money is needed
• Decide whether it is needed short-term or long-term
• List the suitable sources for that need
• Weigh up the cost, control and risk of each
• Choose the most suitable source

Funding a brand-new business

A brand-new start-up has no track record and no past profit. Which source is a founder most likely to use to get going?

• Personal savings, their own money
• Retained profit from past years
• A large long-term bank loan
• Selling shares on the stock market

Where the money comes from

Tap the TWO statements that are TRUE.

• An overdraft is a short-term source of finance.
• Retained profit is profit kept back and reinvested.
• Trade credit means paying the supplier before the goods arrive.
• Crowdfunding is money from one single wealthy investor.
• A brand-new start-up can use retained profit straight away.

Choose the finance

Pick the best source of finance for each business situation.

• A shop needs to cover its wages for a few weeks until a large customer payment arrives. Which source fits?
• An established, successful business wants to fund a new factory from its own success, without borrowing. Which source?
• A founder with a strong idea but little money wants investment plus some business advice. Which source?

Recommend a source

A small bakery wants to buy a second oven costing 8000 pounds. Recommend one suitable source of finance and justify your choice. Then explain why an overdraft, a short-term source, would not be suitable.

• Recommend one source, such as a bank loan or retained profit
• Explain why it suits a large, long-term purchase like an oven
• Explain one advantage of your chosen source
• Explain why an overdraft, being short-term, would not suit a lasting purchase