5. What are the main sources of fi nance for a business? Having a positive cash fl ow may not be enough to pay for everything a business
needs. Businesses like Outdoor World may need to borrow money to purchase equipment and stock, buy a delivery van or to build an extension. The right source of fi nance must match the use for which it is needed. As with personal fi nance, sources of fi nance for businesses can be short-term, medium-term or long-term.
Sources of Business Finance Internal Sources
• Owner’s equity • Retained earnings
External Sources Short-term (0-1)
Short-term fi nance should be repaid within one year. It is useful for overcoming temporary shortages of working capital.
• Trade credit • Overdraft
Medium-term (1-5) Medium-term fi nance should be repaid within one to fi ve years. It is normally used for purchasing expensive assets such as equipment or vehicles.
• Term loans • Hire purchase • Leasing
Long-term (5+)
Long-term fi nance does not need to be repaid for at least fi ve, or more, years. It is normally used for large investments in premises or to take over other businesses. • Retained earnings • Grants • Long-term loans • Sale and leaseback
