Sources of Business Finance
Need for Finance
Businesses require finance for fixed assets, working capital, expansion, technology, inventories and day-to-day operations.
Owners’ Funds
Equity shares represent ownership capital in a company. Retained earnings are profits kept in the business rather than distributed. Owners’ funds generally do not create a fixed repayment obligation in the same way as borrowed funds.
Borrowed Funds
Debentures, loans, public deposits and trade credit are examples of borrowed finance. Borrowing creates repayment obligations and may involve interest or other costs.
Trade Credit
Trade credit allows a buyer to obtain goods or services from a supplier with payment at a later date. It can support working capital but depends on supplier terms and creditworthiness.
Factors Affecting Choice
Businesses consider cost, risk, control, flexibility, repayment burden, purpose, period of finance and market conditions when selecting a source.
Explained MCQs
- Why is retained earnings considered an internal source?
Answer: It is generated from the business’s own profits retained for future use.
Explanation: The business does not obtain these funds by borrowing from an external lender. - What is a major difference between equity and debt?
Answer: Equity represents ownership, whereas debt represents a borrowing obligation.
Explanation: Debt normally involves repayment according to agreed terms, while equity holders have ownership rights.