IB Business and Management

3.1 Sources of Finance

Learning Outcomes

• To evaluate the advantages and disadvantages of different forms of internal and external finance

• To evaluate the appropriateness of a source of finance for a given situation

Finance

Businesses need money. This money can come from a range of different sources. These are known as ‘Sources of Finance’

What do businesses need money for? Brainstorm some ideas. Can these be grouped into categories?

4 key reasons why businesses need finance….

• Start-up• Cash flow• Renewal• Expansion

Task – Brain storming

• Using the Mini-whiteboards…..• Where does this money come from? Write down a

list of where you think this money can come from

Internal Vs External Sources

Internal Sources of Finance

• Finance from within the business

• Usually involve no cost• However…. Are finite

and will not always be sufficient

External Sources of Finance

• Finance from organisations outside of the business

• Usually involve paying interest OR selling part of the business

• Can be Short-term, medium term or long-term depending on the pay back period

What organisations might provide external finance for businesses?

2 Types of Finance

Internal Sources

External Sources

Government

Creditors

Factoring Company

Charities

Banks

Venture Capitalists

Profits

Owners/

shareholders

Assets

Business Angels

Sources of Finance

Internal

Retained Profit

Sale of Fixed Assets

Owners/Share Capital

Sale and Leaseback

Working Capital

Rights Issue

External

Short Term

Overdraft

Trade Credit

Debt Factoring

Medium Term

Bank Loan

Hire Purchase

Leasing

Long Term

Share Issue

Venture Capital

Business Angels

Bank Loan

Mortgage

Debentures

Grants and Subsidies

Inc

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Sel

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Lets be questioning…..What questions do you want to ask about this diagram?

Task

Fill in the sources of finance table.The ‘How it works…’ column has already been filled inYou need to match up the correct source of finance and then fill in the advantages and disadvantages columns.

Feel free to use discussion and internet research to help you.

CHOOSING THE RIGHT SOURCE OF FINANCE

Making the right choice….

In any given situation, businesses will have to make a choice about which source of finance to use (And so will you in your IB exam!!)Two things have to be considered….1. What sources are available2. Which is the best option

What factors are likely to affect the availability of finance in a given situation?What factors would a firm consider when deciding which is the best option?

Factors to consider - Choosing a source of finance

Availability may be affected by:• What the finance is needed for• The ownership type/size of the business• State of the economy• Level of risk involved

Business would then consider:• How and when repayments will have to be made• The level of the repayment• How quickly the finance is needed• The overall cost of borrowing the money• The amount of finance needed• Attitude towards diluting ownership

TASK

For each of these scenarios…..1. write a list of the options likely to be available2. Pick which you think is the BEST option3. CAN YOU JUSTIFY YOUR ANSWER?- Why is it better then other options?- Why is it still the best option despite the downsides?- Are there any conditions on your recommendation?- Is there any other information you need to know?

Sandwich Delivery – Sole Trader

• The owner would like to replace his motor bike with a small van so he can transport a greater quantity of sandwiches

Clothing Manufacturer – Public Limited Company

• A successful clothing manufacturer needs finance to build an additional factory

Accountants- Partnership

• The firm are finding that their existing computers are difficult to maintain and are too slow. It needs ten new computers and software

Plumbers – Partnership

• The partners have recently expanded and need money to cover materials and additional running costs until they get paid by their customers

Farm – Private Limited Company

• The owners have decided to buy the vacant farm next to theirs, they need money to buy the land and also for farm machinery