Potential Sources


  • Finances the whole business over many years

  • Share capital

  • Retained profits

  • Venture capital

  • Mortgages

  • Long-term bank loans


  • Finances major projects or assets with a long life

  • Bank loans

  • Leasing

  • Hire purchase

  • Government grants


  • Finance day to day trading of the business

  • Bank overdraft

  • Trade creditors

  • Short-term bank loans

  • Factoring

Types of sources


  • Founder finance
  • Retained profits
  • Friends and family

Founder Finance

  • Cash and investments
  • Redundancy payments
  • Inheritances
  • Personal credit cards
  • Re-mortgaging
  • Putting time into the business for free

Importance of personal sources to startups

  • Cheap (comparatively)
  • Entrepreneur keeps more control over the business
  • The more the founder puts in, the more others will invest
  • Little red tape or delay
  • Skin in the game

External sources

  • Bank loan
  • Bank overdraft
  • Business angels
  • Loans and grants

Internal Sources—Detail

Retained Profits

  • An internal source of long-term finance

  • A good indicator of the firm’s success

  • Allows surplus profit to be used for future activities

  • If used properly, can cause share prices to rise, appeasing shareholders

  • Advantages

    • Cheap
    • No security required
    • Independent and confidential
    • Shareholder goodwill
    • Management of dividend payments
  • Disadvantages

    • Impact on dividends to shareholders
    • Misuse of funds
    • Possibility of overcapitalisation and ineffective use of funds
    • Opportunity cost

Ordinary Share Capital

  • Advantages
    • Limited liability encourages shareholders to invest
    • It is not necessary to pay a dividend
    • Bringing new shareholders into a small business can add further expertise
    • Increasing ordinary share capital can make it easier to borrow more funds from the bank
    • Ordinary share capital is permanent
  • Disadvantages
    • Possible high dividend payments
    • Conflict of objectives
    • Loss of control of original owners

Asset Disposal

  • Selling an asset that is not vital to the core business to raise capital quickly

  • Advantages

    • Quickly reduce the responsibility of the business
    • Quickly gain working capital
  • Disadvantages

    • Sacrifices part of the business
    • May reduce ability to compete in future
    • May reduce the size of your portfolio

Working Capital

  • Money that already exists within the business

  • Advantages

    • The money is already available
    • No agreements or repayments needed
    • Quick
  • Disadvantages

    • Requires the cash to already exist within the business
    • Isn’t guaranteed

External Sources—Detail

Bank overdraft

  • Widely used and flexible

  • Useful for businesses with seasonal sales

  • Rate of interest is always variable

  • Security typically not required

  • Banks can demand immediate repayment, but this is rare

  • Overdraft agreements can be revised and are typically treated as a reliable source of finance

  • Advantages

    • Extremely flexible
    • Interest is only paid on the amount of the overdraft being used
    • Particularly useful to seasonal businesses
    • Security is not usually required
  • Disadvantages

    • Level of interest rate charged
    • Flexible interest rates
    • Banks can demand immediate repayment
    • Paperwork demands


  • Bank agrees to lend a sum of money to the firm or individual for an agreed, specific purpose.

  • Creditors are providers of loan capital

  • They charge interest and must be paid before any dividends are received by shareholders

  • If a business goes into liquidation, creditors must be paid in full before anyone else

  • Advantages

    • Easy for budgeting
    • Lower interest rates
    • Designed to meet the company’s needs
  • Disadvantages

    • Limitations on amount available
    • Inflexibility
    • Potential expense

Venture Capital

  • Typically, between £50,000 and £150,000

  • Provided by individuals, usually known as business angels

  • High risks but frequently has very good returns

  • Advantages

    • Suited to high-risk companies
    • Venture capitalists may allow interest or dividends to be delayed
    • Source of advice and contacts
  • Disadvantages

    • Giving up some ownership of the business
    • Possible high finance costs
    • Excessive influence


  • Long term loans made to a business

  • Fixed interest rate (%)

  • Repayable on a selected date

  • Advantages

    • Very explicit, guidelines and times need meeting
    • Fixed repayments
  • Disadvantages

    • Finance must be returned by a certain date

Debt Factoring

  • Selling debts to a debt factoring company for a percentage of the full amount

  • Advantages

    • Quick return
    • Works with potential bad customers, not repaying their debts to you
  • Disadvantages

    • You don’t get the full amount back
    • Might damage reputation with customers