F

O
S
E
C
R
U
O
S
S
U
O
I
R
VARIOUS
SOURCES
OF
A
V
FINANCE

SOURCES OF
FINANCE
S

EXTERNA
L

INTERNA
L

SAVINGS

RETAINED
PROFIT

WORKING
CAPITAL

SALE OF
ASSETS

SHORT
TERM

MEDIU
M
TERM

LONG
TERM

BANK OD
CREDITOR
S
DEBT
FACTORIN
G

LEASING
HIRE
PURCHAS
E
BANK
LOAN

SHARES
DEBENTUR
ES
LONG
TERM
LOANS

INTERNAL SOURCE OF
FINANCE
Come from trading of business
Day to day cash from sales to customers
Money loaned from trade suppliers through
extended credit
Reductions in amount of stock held by
business
Disposal (sale) of any surplus assets no
longer needed (e.g. selling a company car)

savings

n
Retained
profits

Internal
Source of
finance

Sale of fixed
asset

Working
Capital

* SAVINGS
Savingisincome not spent, or deferredconsumption.
Methods of saving include putting money aside in, for
example, adeposit account, aninvestment fund, or ascash.
Saving also involves reducing expenditures, such as
recurringcosts

* WORKING CAPITAL
It is a financial metric which representsoperating
liquidityavailable to a business, organization or other
entity, including governmental entity.
WC= CA - CL

The amount available for day-to-day running of

business that comes from selling goods &
services. It is used to pay everyday costs (ex.
wages, bills, suppliers)
ADVANTAGES
DISADVANTAGES
internal source; no
interest
easily accessible

cannot fund larger

projects
short-term liquidity
is affected

RETAINED PROFIT
Internal profits or ploughed-back profits. Value of profits
the business keeps hold of to use withinthe business
(after paying taxes to government and dividends to
shareholders). This is usually used for purchasing or
upgrading fixed assets and sometimes kept in
contingency funds in case of emergencies and
unforeseeable expenditure in the future

ADVANTAGE
no need to rely on
borrowing (no
interest charges)

DISADVANTAGE
may not be
sufficient, so other
sources may still
be needed

SELLING ASSETS
The selling of excess or underused
assets
ADVANTAGE
Immediate retrieval
of cash from
purchase

DISADVANTAGES
Assets may grow in
value
Assets possibly
useful for loans

EXTERNAL SOURCES OF
FINANCE
Short-term:Refers to the current tax year
Medium-term:Refers to the time period
of more than twelve months but less than
five years
Long-term:Refers to any period after the
next five years

BANK OVERDRAFT
Allowing a business to temporarily overdraw on
its account (taking more amount than it has)
interest is charged.
ADVANTAGES
For company with minor
cash flower problem can
satisfy need
Suitable for businesses
that have sold items on
credit and are awaiting
payment from customers
Flexibility for business
that may face cash flow
problems from time to
time

DISADVATAGES
Overdrafts are repayable
on demand without prior
notice from the lender
High rate of interest
(expensive for long term
borrowing)
If business unable to
meet repayment
deadlines, business
assets will be affect

DEBT FACTORING
Debtors are people who owe money to a business. Debt
factoring is a financial service that allows a business to
raise funds based on the value owed to them by their
debtors

ADVANTAGES
reduce the
probability of BAD
DEBT-DEBTORS
Immediate source
of finance

DISADVANTAGES
Without non-recourse
factoring the company
will still have to
absorb losses
Expensive

BANK LOANING
Borrowed money by commercial lenders like banks. A
medium to long-term source of finance and interest
charges imposed (fixed/variable). Depending on
agreement between borrower and lender borrowed, the
amount paid back is in installments and spans over a
definite and predetermined period

ADVANTAGE
loans can be catered
to meet specific
needs of borrower
can be set up quickly

DISADVANTAGES
if borrower defaults on
the loan, the lender
can repossess property
sometimes
prepayment penalty
payments can
overtake income of
borrower

LEASING
Leasing involves using an asset, but the ownership does
not pass to the user. Business can lease a building or
machinery and a periodic payment is made as rent, till
the time the business uses the assets. The business does
not need to purchase the asset.

ADVANTAGES
The business can
benefit from the
asset without
purchasing it.
Usually the
maintenance of the
asset is done by
the leasing firm.

DISADVANTAGE
The total cost of
leasing may end up
higher than the
purchasing of asset

HIRE PURCHASE
Paying for an item in parts (installment plan)
vehicles, machinery, office equipment and
farming machinery. A deposit (down
payment) is paid on the item.
ADVANTAGES
can pay for items
in installments (12
or 24 months)
item belongs to the
business once all
payments have
been made

DISADVANTAGE
If the buyer fail to
pay in time, then
the lender can take
the item back

ISSUE OF SHARES
It is a permanent source of finance but only available to
limited companies. Public limited companies can sell
further shares up to the limit of their authorized share
capital. Private limited companies can sell further shares
to existing shareholders.

ADVANTAGE

DISADVANTAGE
Permanent source of
capital. In case of
ordinary shares
business will only
pay dividends if
there is a profit.

Dividends have to
be paid to the
shareholders.

DEBENTURES
A type of long-term loan to a business with the
promise of a fixed annual interest paymentto the
debenture holders. Debentures are similar to
shares, however, debenture holders DO NOT have
voting rights on how the business is run.

ADVANTAGE
provides good longterm finance
without losing
control of the
business

DISADVANTAGE
firm increases the
amount of long-term
liabilities raising the
amount of interest
payments to the
lenders