Chapter 26 – Business Finance
1. Reasons why Business Finance is Needed
Business finance is needed to meet short-term and long-term needs and can be used to set up or grow a business
Short-term Finance Needs
• Finance is needed by business to meet short-term and long-term liabilities and to fund day to day
activities
• Short-term sources of finance are needed to meet day to day costs such as paying bills,
suppliers and employee wages
o They are likely to be relatively small amounts and are rarely needed beyond a year
• Where revenue from sales does not cover these expenses sources such as overdrafts or trade
credit may be useful
Long-term Finance Needs
• Longer-term sources of finance are needed to fund the purchase of non-current assets such as
buildings and other types of capital resources or to acquire other businesses
o These are likely to be large sums that may be required for a significant period of time
• Where retained profit is not sufficient to meet these needs, businesses may consider taking out long-
term loans, mortgages or raising share capital
Start-up Finance
• Start-up finance is needed by a new business to pay for fixed assets and current assets such as stock
before it can begin trading
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• The amount of start-up finances a business need is identified in the business plan
o Owners often invest their own capital into a new business
o Some small new business owners obtain a start-up loan to cover initial costs
Financing Business Expansion
• As a business grows more finance may be needed to purchase capital equipment
o It may require more machinery, buildings, IT infrastructure or vehicles which help the
business to increase output
• If a business wants to grow by developing new products large amounts may need to be invested
in research and development (R&D)
o E.g. Apple's annual research and development expenses for 2023 were $29.915 Billion, a
13.96% increase from 2022 to invest heavily in Artificial Intelligence (AI) and
product innovation
2. Introduction to Internal Sources of Finance
• An internal source of finance is money that comes from within a business
• Business owners often prefer using internal finance as it avoids having to pay interest on borrowing
or dilution of control by selling shares
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Personal Savings
• Personal savings are a key source of funds when a business first starts up
o Owners may introduce their savings or another lump sum, e.g. money received following
a redundancy
o Owners may invest more as the business grows or if there is a specific need, e.g. a short-
term cash flow problem
Retained Profit
Retained Profit
Selling Assets
• Retained profit is the surplus of revenue over costs that has been generated in previous years and
not distributed to owners
• This is a cheap source of finance, as it does not involve borrowing and associated interest and
arrangement fees
• The opportunity cost of investing the money back into the business is that shareholders do not
receive extra profit for their investment
• Selling non-current assets that are no longer required (e.g. machinery, land, buildings) generates
finance
• A sale and leaseback arrangement may be made if a business wants to continue to use an asset but
needs cash
o The business sells a non-current asset (most likely a building) for which it receives cash
o The business then rents the premises from the new owners
o E.g. In early 2023, Sainsbury’s announced that it was in talks to sell the prime retail property
for £500 million, which will then be leased back to them by the new owners, LXi Reit
• Businesses may also sell inventory at reduced prices in order to raise additional finance
o This reduces the risk and storage costs of holding large volumes of inventory
o It must be done carefully to avoid disappointing customers if inventory runs low
E.g. Clothing retail businesses commonly hold January sales to get rid of old inventory and
make space for new Spring product lines
An Evaluation of Internal Sources of Finance
• If a business has sufficient internal finance, it is often preferred to using external sources
• However, it must consider the advantages and disadvantages of using internal finance to fund
business activities
Advantages and Disadvantages of Internal Sources of Finance
