Sources of Finance for a Business


When a business needs to pay for something and is not using cash from its bank account, it has to decide on the right source of finance to use. The rule is simple: a source of finance should match the purpose of the finance (matching short-term finance to a short-term use).


Short-term finance


Day-to-day


Medium- term finance


1-5 years


Long-term finance


> 5 years


The purpose of short-term finance is to cover day-to-day spending for a business. Examples of this are:


ґ paying wages ґ buying stock ґ paying bills like broadband or electricity bills


The purpose of medium-term finance is to spend money on assets that will last between one and five years. Examples include:


ґ buying a vehicle or delivery van ґ buying new equipment or machinery


The purpose of long-term finance is to cover major investment for the future. Examples of this are:


ґ expanding the business ґ opening a new premises


EXAM CORNERINTRO ACTIVITY


2019 Sample Paper Q9 SOLAS Ltd is considering purchasing a new electric or hybrid sales vehicle. (a) Tick (✔) the most suitable source of finance that might be used to purchase this vehicle. Short term Medium term Long term (b) State one reason for your choice.


A business is likely to use an electric sales vehicle for 1-5 years so a medium-term loan would be a good option.


CLASS ACTIVITYINTRO ACTIVITY Key Skill: Match a source of finance to the correct purpose


For each item on the list below, identify whether it would be a short-term, medium-term, or long-term source of finance that would be appropriate to pay for it. 1. Buying a new vehicle 2. Purchasing a new factory 3. Buying new machinery 4. Paying for stock 5. Paying the electricity bill


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STRAND 2 CHAPTER 24: Sources of finance and the cash flow budget


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