Sources of Finance for Growing Businesses (Edexcel GCSE Business)

• All businesses need finance in order to get started, allow them to grow and fund their continuing activity 

• Finance may be needed for capital expenditure which is spending on fixed assets such as equipment, buildings, IT equipment and vehicles
  

• Similarly, finance is required for revenue expenditure which is spending on raw materials or day to day expenses such as wages or utilities 

• Businesses have different sources of finance available to them
  • When the finance comes from inside the business it is called an internal source of finance
  • When the finance comes from outside the business it is called an external source of finance
      

The different types of internal and external sources of finance available to help businesses grow

• Internal finance comes from the owner’s capital, retained profit, or the sale of assets
   

Owner’s capital: personal savings

• Personal savings are a key source of funds when a business starts up
  • Owners may introduce their savings or another lump sum e.g. inheritance money
• Owners may invest more as the business grows or if there is a specific need e.g. a short-term cash flow problem

Retained profit

• The profit that has been generated in previous years and not distributed to owners is reinvested back into the business
• This is a cheap source of finance, as it does not involve borrowing and associated interest payments
• The opportunity cost of investing the money back into the business is that shareholders do not receive extra profit for their investment

Sale of assets

• Selling business assets which are  no longer required (e.g. machinery, land, buildings) generates a source of finance
• A sale and leaseback arrangement may be made if a business wants to continue to use an asset but needs cash
  • The business sells an asset (most likely a building) for which it receives cash
  • The business then rents the premises from the new owners
  • E.g. In early 2023 Sainsbury’s announced that it is in talks to sell the prime retail property for £500m which will then be leased back to them by the new owners, LXi Reit
     
• A business can also generate additional finance internally by managing its cash flow more effectively
  • They can negotiate extended payment terms with suppliers
  • They can incentivise customers to pay more promptly for credit purchases

The Pros & Cons of Using Internal Finance

• External finance is sourced from outside of the business
• Two of the most common forms of finance include bank loans and share capital
  • Share capital for private limited companies (Ltd) is usually sourced by selling shares to family and friends, or private venture capitalists
  • Share capital for public limited companies (plc) is usually sourced by listing share on an initial public offering and selling them to investors through a stock exchange
     

An Explanation of the External Sources of Finance Available to Businesses