Sources of finance · GCSE Business

Why businesses need finance

To start up (equipment, premises and stock), to run from day to day (bills and wages), and to grow (expansion and new products).

An overdraft lets a business take more money out of its bank account than it has, up to an agreed limit. It is flexible, but the interest rate is high.
Trade credit means buying from suppliers and paying later, often after 30 or 60 days. There is no interest, but the business may lose discounts for paying early.

A bank loan is a fixed sum repaid with interest over a set time. The bank may want security (collateral).
Share capital is money raised by selling shares (only limited companies can do this). It doesn't need repaying, but the owners lose some control and share the profits through dividends.
Retained profit is profit kept in the business. There is no interest, but there may not be enough.
Venture capital is investment in a risky, growing business in exchange for a share of ownership; investors may also bring expertise.
Crowdfunding raises small amounts from many people online, often in return for rewards or shares.
Owners' savings, selling assets and government grants are other sources.

The best source depends on how much is needed and for how long, the cost (interest), the type of business (only companies can sell shares), the risk, and how much control the owners want to keep.
Match the finance to the use: short-term needs suit short-term finance, and long-term investments suit long-term finance.

Overdraft: An agreement to take more money out of a bank account than it holds, up to a limit.
Trade credit: An agreement to pay a supplier at a later date.
Bank loan: A sum borrowed from a bank and repaid with interest over a set time.
Share capital: Money raised by selling shares in a company.
Retained profit: Profit kept in the business rather than paid out.
Venture capital: Investment in a risky business in exchange for a share of ownership.
Crowdfunding: Raising small amounts of money from many people, usually online.
Interest: The cost of borrowing money.
Collateral: An asset offered as security for a loan.