Sources of finance
Internal vs external
- Finance comes from inside (internal) or outside (external), and is short- or long-term.
- Internal: retained profit (kept in the firm), sale of assets.
- External: share capital, loans, debentures, overdraft, leasing, hire purchase, trade credit, venture capital, crowdfunding, microfinance.
Practice
Which is an internal source of finance?
Retained profit and sale of assets are internal; loans, shares and overdrafts are external.
Choosing a source
- the amount needed (large → shares or a long loan),
- the purpose (long-term assets → long-term finance),
- the cost (interest, fees),
- the legal structure (only a company can sell shares),
- existing debt and whether it can offer collateral.
Practice
Only which type of business can raise finance by selling shares?
Selling shares (share capital) is available only to companies (Ltd or plc).
Practice
Long-term assets should usually be financed with long-term finance.
Matching the finance term to the purpose avoids cash-flow strain — long assets need long finance.
You've got it
Key idea
- internal: retained profit, sale of assets; external: shares, loans, overdraft, leasing, trade credit…
- match the term to the purpose: long-term assets → long-term finance
- choice depends on amount, purpose, cost, legal structure, collateral