Sources of Finance

Sources of finance are the various points of generating funds to fulfill business objectives.

Internal finance comes from the trading of the business. It is the fund generated by regular business operations
External finance comes from individuals or organisations that do not trade directly with the business

Internal Finance

• Retained profit - profit revenue from previous years' operation
• Liquidization - Sale of unutilized fixed assets in order to cover for day to day expenses
• Working capital - the amount of money that circulates within a business used to cover day to day expenses and short term debts

Advantages:

• Readily available
• No cost of borrowing
• Does not increase liability of the business

Disadvantages

• Limited in supply
• Can hinder regular operation if overused

External Sources of Finance

• Bank loan
• Bank overdraft
• Leasing
• Hire Purchase
• Venture Capital - Venture Capitalists are companies who invest in small scale businesses with unique ideas. The money is not a loan but an investment. 
• Debentures 
• Share capital
• Debt factoring
• Trade credit

Advantages

• Greater in supply
• The business can save internal cash for future usage

Disadvantages

• Requires time and paperwork to get sanctioned
• Includes cost of borrowing
• Increases liability

Gearing Ratio = Debt Capital x 100

                          Total Capital

If the gearing ratio is more than 50% it is regarded as a high geared company and vice versa.