Sources of finance

In one paragraph

Businesses fund themselves from money they already have, money they borrow, or money they raise by selling a share of the business.

Internal sources — retained profit, selling assets, tighter working capital. No interest and no loss of control, but limited by what the business has already made.

Debt — bank loans, overdrafts, asset finance, invoice finance. You keep ownership and you repay with interest whether or not the year goes well. Lenders usually want security, and for small companies that often means a personal guarantee.

Equity — selling shares to investors, from friends and family through angels to venture capital. No repayments, and no interest if things go badly. In exchange you give away part of every future profit and part of the control, permanently.

Matching the source to the need

The rule that examiners reward and owners forget: match the length of the finance to the length of the need. Fund a van over three years, not on an overdraft. Fund a seasonal stock build with an overdraft, not a ten-year loan. Fund losses with neither — fix the losses.

How to actually use it

• Ask what happens to each option if next year is bad. Debt still wants paying; equity does not. That asymmetry is what you are really buying.
• Compare the true cost, not the headline rate — arrangement fees, exit fees and whether the rate is flat or APR. /tools/loan-comparison-calculator

Where it breaks down

• Availability decides more than theory does. A new business with no trading history and no security often cannot access most of this list, whatever the textbook says is optimal.

If you are being examined on it

Always justify against the business's situation — age, security, whether the owner will accept dilution. A generic list of sources scores badly.

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