Finance5352

For many businesses, the issue about where to get funds from for starting up, development and expansion can be crucial for the success of the business. It is important to know the different sources of finance open to a business and how appropriate these sources are in relation to the needs of the business. The sources of finance for a limited company are divided between internal and external sources.

Inside internal sources we can point out retained profit and working capital. The first one is the cheapest and it is the profit not paid out as dividends, but retained by the company to be reinvested in its core business or pay debts. The other one is the short-term capital that a business keeps, in other words, the money used to pay for the everyday trading activities carried out by the company. It is defined as the difference between current assets and current liabilities. Another internal source that we can consider is the sale of assets.

There are two types of external sources: the first one is aimed at ownership capital as issuing shares and the other is for non-ownership capital. Bonds are loans that are usually secured and are said to have either fixed or floating charges with them. Depending on the creditworthiness, the company would pay more interest than a safe company or blue chip. Leasing is like renting a piece of equipment or machinery in which the business pays a regular amount, but the item belongs to the leasing company. Leasing is cheaper in the short run and can be regularly replaced. In the other hand, it is more expensive in the long run. Other important ways are factoring which is the sale of accounts receivables and is expensive, and government finance which generally offers important advantages.

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