SOURCES OF BUSINESS FINANCE
Complete the table below and save it in your ‘Sources of Finance’ Folder
SOURCE OF When it might be
When other sources are May be flexible in Could lead to disputes
not available repayments between family members
When banks refuse to May charge little or and friends
Borrow money from lend money to you no interest May not be able to lend
friends / family Probably when first Do not have to large amounts
setting up before you provide security
have an established
Owners’ own funds
Retained profit from
Bank loans /
Hiring / Leasing
Sale of Assets
In the second year of trading, Sam’s Music won a contract to supply musical equipment to a local
orchestra. It meant the opportunity for fairly rapid expansion and was greeted with joy by the owner,
Sam Shadow. However, it meant a finance problem in the short run as the equipment needed to be
bought from the manufacturers up front. Sam had no reserves of money to draw upon. He needed
£20,000 to buy the equipment but would not be paid by the orchestra for three months.
1. Identify three suitable sources of finance that Sam
2. Which would be the most suitable source of finance?
After three years of moderate growth, Artyfax printers are looking to buy new hi-tech equipment in
order to broaden the range of customers they could attract. Owner, Dave Fugg, wishes to keep the
ownership of the business to himself but realises he may need to spend lots of money to fulfil his
dream. £25,000 is needed to finance his plans. Profits last year were £15,000 and this money is in
his bank. He needs help.
4. If Dave was prepared to give up some control of his business, which source of finance could
help him bring external finance into the company?
5. Why might he choose not to do this?
6. Identify three other suitable sources of finance that Sam
7. Why can’t he use his retained profit?
8. What else might he have to do?
9. Identify two potential problems with this choice
Pete Gianni left college dreaming of running his own clothes boutique. He planned to provide an
outlet for the work of local designers and manufacturers and keep his range of products unique and
different from mass-produced designs found in high street stores. Determined to help the local
community, he planned to employ young people who were unemployed and train them to run his
shop in a friendly and efficient manner. He had £25,000 of his own money but needed at least as
much again in order to finance his plans.
10. If Pete is providing such a positive service to the local community, what source of finance
may be available to him?
11. What advantages would this bring?
12. Pete also believes that he would need a bank loan to help with his plans. Identify two
advantages and two disadvantages of this source of finance.
Sandra Smith has worked as a lawyer for eight years but feels frustrated at working for someone
else. She has a number of clients who would use her services if she were to branch out on her
own. She calculates that she would need around £20,000 to set up independently in smart offices
with secretarial support and advertising. She has managed to save £10,000 of her own money and
her husband, Clive, also has shares worth £10,000 that he is prepared to sell in order to help her.
13. Clearly, Sandra could finance her plans herself with the help of her husband. Why might she
decide not to follow this course of action?
14. What other sources of finance might she decide to use? Why?
15. What would this cost her?
Markham Properties Ltd own a successful hotel set in 400 acres of rolling countryside. The hotel
itself is a bit ramshackle and needs repair but Hannah, the Chief Executive, realises that the
company do not have the funds to undertake the refurbishment. The land that the hotel sits on is
probably its most valuable asset and Hannah knows that there is a shortage of land for housing in
the area. She wonders whether there might be a solution to her problem.
16. How could Hannah solve the problem of finding finance for refurbishment?
17. Her accountant, Wilf, believes she should explore other possibilities. What other options
might she have?
18. What information might a bank manager want to see before he/she decided whether to lend
money to the company?
Greg Ponytail wants to set up a company that designs websites for companies that want an internet
presence but no little about computers. Image is everything and he has his sights set on trendy
offices, pretty secretary, expensive lunches, sharp suits etc. He is really not too concerned about
sharing the profits so long as he gets to live the jetset lifestyle of business tycoon. Someone
suggested he look up a VC company.
19. What does ‘VC’ mean?
20. What advantages would this arrangement give to Greg?
21. Why would these companies invest money in businesses that they know little about?
22. What happens to the business risk if a VC deal is made?
Carl Morton runs a stationery shop near his local university. He has a couple of photocopiers and
he makes a reasonable profit from providing students with this service. Recently, there has been
more and more demand for colour photocopying and he has explored the possibility of buying a
colour copier. The cost would be £12,000 and he knows that there is no way he can afford it. The
bank manager has turned down his loan application, his profits are tiny and he has no money of his
own. He can’t afford the machine outright but he knows he could make it pay once he has it in his
23. Why might Carl decide to lease the machine?
24. What are the advantages to Carl?
25. Why might a manufacturer be prepared to agree to this deal?
26. How would the lease arrangement work?