A business enterprise can finance its operation from various sources. These vary with the size of the business and the stage of growth. Sources are categorised as either internal or external. Internal sources are generalised within the business while external sources are acquired from other parties.
Examples of internal sources are:-
- Personal finance- personal savings are a major source of capital during the start-up stage. The personal savings may be obtained from former employment, money saved in savings/ fixed deposit accounts, sale of personal assets such as land.
Advantages of this source are:
- It is the least expensive since no interest is paid.
- It does not involve legal process of acquiring
- It allows for flexibility on the use of funds
- It may be inadequate for business needs.
- May be used without proper planning.
- May take too long to raise adequate capital.
- Retained earnings – These are the unutilized profits from previous years which can be used to finance other needs such as expansion and acquisition of more assets.
- Provision for depreciation and provision for taxation – These can only be borrowed for a short period of time before replacement of depreciated assets or payment due to taxes that are made .
- Sale and lease back – A business can opt to sell its assets and then lease the same from the new owner. It will be paying rent for use of the assets.
- Sale of assets – A business could have at its disposal assets that can be converted into cash. Good examples of such assets are old equipment, motor vehicles and other chattels.
External sources of business finance.
This type of finance is obtained from persons and parties other than the business owners.
Examples of external sources are:-
- Trade creditors – these provide a business with goods on credit terms such as 90 days before repayment can be made. The entrepreneurs can sell the goods and use the proceeds to pay off the creditor on the due date.
- Loans – these are borrowings from commercial lending institutions. The terms and institutions vary from one institution to another.
- Overdrafts – These are short term sources of finance from commercial banks that a business can resort to in order to solve its liquidity problem. The repayment period is normally one year.
4.Hire Purchase – a business can get equipment from a hire purchase firm and pay for them in installments until the whole line purchase price is paid. It becomes the property of the business when the last installment is paid, otherwise it was on hire before such last payment.