The main sources of finance are internal (retained profit, working capital, selling spare assets) and external: equity (new shares, venture capital, business angels) or debt (loans, bonds, leasing, overdrafts, trade credit), plus grants. The right choice depends on cost, availability, control, cash flow, security, gearing and exit routes.
Sources of finance at a glance
| Source | Type | Term | Pros | Cons |
|---|---|---|---|---|
| Retained profit | Internal equity | Long | No issue costs or dilution | Limited; reduces dividends |
| Working capital (collect faster, pay later, cut stock) | Internal | Short | Quick, cheap | May upset suppliers and customers |
| Sale of spare assets | Internal | One-off | No repayment | Can be sold only once |
| Rights issue | External equity | Long | Existing shareholders keep control | Depends on shareholders having cash |
| New share issue | External equity | Long | Large sums, no repayment | Expensive, dilutes control |
| Debentures and bonds | Debt | Long | Interest tax-deductible, no dilution | Fixed interest, usually secured |
| Mortgage | Debt | Long | Low rate as secured on property | Property at risk |
| Bank loan | Debt | Medium | Simple, defined repayments | Covenants, security needed |
| Leasing | Debt-like | Medium | Use assets without buying them | Costs more over time than buying |
| Overdraft | Debt | Short | Flexible | Expensive; repayable on demand |
| Trade credit | Debt | Short | Free if paid on time | Lose discounts; damages relationships if stretched |
| Venture capital and business angels | Equity | Long | Money plus expertise | Give up a share and some control |
| Crowdfunding | Equity or reward | Long | Marketing benefit | Public failure if target missed |
| Government grants | Other | Varies | Often no repayment | Strict conditions, competitive |
How to choose: seven factors
Chapter 18 of the book lists the factors to weigh:
| Factor | Question |
|---|---|
| Cost | What are the interest, fees or return expected? |
| Availability | Will lenders or investors actually provide it? |
| Control | Will owners give up control or accept conditions? |
| Cash flow | Do repayments match when the business earns cash? |
| Security | What assets or guarantees are needed? |
| Gearing | How much more debt can the business safely carry? |
| Exit route | How and when will it be repaid or the investor leave? |
A useful rule is matching: fund long-term assets with long-term finance, and short-term needs with short-term finance.
Sources of finance in ACCA SBL
Finance in planning and decision-making is syllabus area G. A typical task asks how to fund an expansion or acquisition. Recommend a specific source, justify it using the seven factors with case numbers (current gearing, cash flow, shareholder views), and mention the risks. A charity such as Historic Places (March 2025 pre-seen) has no shareholders, so its options are donations, grants, loans, commercial income and reserves.
FAQs
What are the main sources of finance for a business?
Internal sources: retained profit, better working capital management and selling spare assets. External sources: new shares, loans and bonds, leasing, overdrafts, trade credit, venture capital, business angels, crowdfunding and government grants.
What is the difference between debt and equity finance?
Debt is borrowed and must be repaid with interest, but lenders get no ownership. Equity is money from owners in return for shares: there is no compulsory repayment, but control and profits are shared.
What is the cheapest source of finance?
Debt is usually cheaper than equity because interest is tax-deductible and lenders take less risk than shareholders. Retained profit has no issue costs but is not free: shareholders still expect a return on it.
What is gearing?
The proportion of a business's long-term finance that comes from debt. High gearing raises returns to shareholders in good years but increases financial risk because interest must be paid regardless.
What are short, medium and long-term sources of finance?
Short term (under a year): overdrafts, trade credit, factoring. Medium term (one to five years or so): bank loans, leasing, hire purchase. Long term: shares, retained profit, debentures and bonds, mortgages.