Back to: Financial Management
Hello again, class! I trust you’re all doing well and keeping up. In our last lecture, we talked about the role of the financial manager—how they help businesses make smart financial decisions. Today, we will explore something very practical and relevant: sources of finance.
Every business needs money to operate, grow, and survive. But where does this money come from? That’s what we’re going to look at today. Businesses don’t just sit and wait for money to appear. They plan carefully and choose from various ways to raise money, depending on what they need and how urgent it is.
Sources of Finances II
Broadly speaking, sources of finance can be divided into two main types: internal and external sources.
Internal sources come from within the business. They include:
Retained earnings – This is profit that the business has made in the past but has not shared with owners or shareholders. Instead of paying it out, the business keeps it for future use.
Sale of assets – A business can sell things it no longer needs, like old equipment or vehicles, and use the money for new projects.
Owner’s capital – For small businesses, the owner can put in more personal money into the business.
These internal sources are usually cheaper and do not involve any legal agreements, but they may not be enough for large projects.
That brings us to external sources—money that comes from outside the business. These include:
Bank loans – This is one of the most common sources. A business borrows money from a bank and agrees to pay it back with interest. Loans can be short-term or long-term depending on the need.
Trade credit – This is when a business buys goods or services now and pays for them later. It is common in industries where businesses trust each other.
Equity financing – Here, the business sells shares to raise money. The buyers of the shares become part-owners and may receive dividends.
Grants and subsidies – Sometimes, the government or organisations offer money to businesses for specific purposes, especially in agriculture or youth enterprises. This money often does not need to be paid back, but there are usually conditions attached.
Hire purchase and leasing – These allow a business to use an asset while paying for it in instalments. Leasing means the business never owns the item fully, while hire purchase leads to ownership after full payment.
Now, how does a business decide which source to use? That depends on a few factors: – How much money is needed
– How soon the money is needed
– The cost of the finance (e.g. interest)
– The level of risk involved
– Control—whether the owners want to give up part of the business or not
For example, if a business needs a small amount quickly, it may use retained earnings or get a short-term loan. But if it wants to expand into a new region and needs a large amount, it might issue shares or take a long-term bank loan.
To sum up today’s lesson: no business can survive without money. The smart use of both internal and external sources of finance allows businesses to grow and meet their goals. As a future entrepreneur or manager, understanding these sources will help you make better choices when it’s time to raise funds.
In our next class, we’ll look at something very interesting and important—the Time Value of Money. It’s the idea that money today is worth more than money tomorrow. Until then, look around and try to find examples of businesses using different sources of finance. You might be surprised what you learn just by observing.