What are the different sources of finance for my business? How do these work?

26 September 2018
What are the different sources of finance for my business? How do these work?

Three main types of business finance are currently in existence. In order to meet basic needs or day to day requirements, there may be some requirement for finance. Small businesses usually use their own capital for this. However, larger businesses may require more costly loans for things such as replacing worn out machinery.

So what are the specific sources of finance?

The two main types of finance available for businesses are owners funds and borrow funds. Below, we talk about each one in further detail.

Owners fund

Owner funds or owner capital refers to money paid in by the business owner. Equity shares or existing profits are such sources.

Borrow Fund

Money raised through credit or loans is otherwise known as borrowed funds. Common sources include:

  • Debentures
  • Bank loans or loans from other institutions
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What are the types of finance that are available to a business?

At some point, normally every business requires some extra money. And typically, fixed assets is a common way businesses cover these costs. E.g. paying wages and bills. Here, we discuss the three types of finance. Short, medium and long term finance.

Short term finance

This refers to money raised over less than a year for investment purposes. It also goes by other names such as:

  • Working capital
  • Circulating capital
  • Revolving capital

The value you can borrow depends on what your business does or how large it is. As well as your reasons for needing to borrow. It is commonly used for things such as:

  • Daily expenses
  • Profit drops
  • Manufacturing costs
Medium term finance

Within the umbrella of medium term finance, the business owner has a choice of whether to choose a fixed or variable interest rate. As well as the length of time they may wish to take this out over. Usually up to a maximum of seven years. They are usually used to purchase fixed assets. Which are normally things like replacement equipment.

A common option in medium term finance is asset finance and leading. Where assets are spread out for payments. And the bank buys what you need, and you would pay this back to them. E.g. hire purchase or leasing. Such techniques reduce the risk of cash flow problems.

Long term finance

Banks are able to provide commercial mortgages to businesses that need to purchase a new premises. There are many different types of mortgage such as commercial endowment, repayment or pension. 15 years is the typical repayment period.

Another form of long term finance is a fixed asset loan. Ideal for things that can’t be converted back into cash. Such as machinery or property. Ten years fixed is typical for this loan.Your property may be re-possessed if you don’t keep up with payments. As the collateral is the asset itself.

For businesses that are keen to undertake a merger, expansion or acquisition, the banks may be able to help. However, banks are not always able to help. In which case, options for non-bank finance are also available.

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In this article, Angelina Bell has discussed the differences between an owners fund and a borrower fund. An owner fund is where the business owner raises funds themselves whereas a borrower fund relies on borrowed capital such as a bank loan.

Angelina Bell has  also talked about the differences between short, medium and long term finance. Short term finance typically lasts for less than a year and is for things such as paying bills and staff wages. Medium term finance  allows a longer term, typically up to seven years. This is good for purchasing fixed aseets. Finally, long term finance can last up to fifteen years and usually take form of things like mortgages and fixed asset loans.

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