The various sources for financing projects are classified broadly as:
Short term finance sources:
of financing which finance the project for a short duration (1-2 years).
E.g.: trade credit
the sources of financing which finance the project for a duration which is neither too short nor too
long (3-10 years).
the sources of financing which finance
the project for a long duration ( usually more than 10 years )
Various sources of finance are:
the owner uses his or her own savings to
invest in the business.
sole trader will start up a business with their own savings.
business sells off fixed and current assets which it no longer needs, in order to raise
finance for new projects.
kept after all expenses and dividends are paid out.
profit left can be ‘ploughed back’ into the business for expansion purposes.
It belongs to the business.
bank allows a business to go ‘overdrawn’ up to an agreed amount.
business only pays interest on the amount overdrawn.
of interest paid is usually higher than
a bank loan; so caution is needed when using an overdraft.
used to pay small bills and expenses.
suppliers give time to pay for supplies and stock
with a 30 day payment period.
can be difficult for sole traders to acquire in the early days.
an asset is used by a business but is never owned by the business.
business pays a monthly amount to use the asset
in return they have access to the latest
equipment and support if the asset breaks or needs repair.
businesses lease cars or computer equipment.
an asset is bought over a period of time with repayments made each month until,
the final payment
final payment, the item becomes the property of the firm.
This spreads the cost of purchasing assets
An amount of money is borrowed from
the bank and then repaid with interest over a set period of time.
The loan period can range from 1 year to 10
Look for the APR amount – the higher the APR the
more interest is paid.
Long term borrowing similar to selling shares, but with the
promise of repaying
the amount borrowed at a fixed period in
time, usually for a set amount of interest.
Usually used by large organizations and
the debenture is fixed upon a particular asset.
• Long term loan (usually over 25 years) provided by a bank/building society
in order to buy property.
secured on the property itself so if repayments are not made the mortgage
lender can repossess the property
capitalists are groups of (generally very wealthy) individuals or companies
specifically set up to invest in developing
companies (invest in small, risky business)
In return the venture capitalist gets some say
in the running of the company as well as a share in the profits made
loses some of its independence in decision making.
A share in the business is sold to an
individual or another business. This money is then
used to purchase new assets or to expand.
The business changes from a Ltd to a plc
shares can be traded on the stock
Insurance companies and pension funds:
Ø prefer Long term investment- liability to
policy holders and pensioners
Ø recently, invested in shares of ltd companies
ie, applications for capital from smaller
Ø Money received from investors is
added to a fund invested in securities
appropriate to investors.
Ø The fund is divided into units, each
representing a share of fund (‘open ended’)
Ø Specialize in overseas investments
and new issues of securities through stock exchange.
Ø Units can be bought and sold through
the unit trust managers
ended investment co.):
Ø They are open ended funds like unit
Ø But are corporations rather than trusts.
Ø Issue shares-not units-
Ø Greater flexibility and wider appeal to
to individuals to enable them to buy their homes
are borrowed on short term from savers and loaned for the long term to
is smoothed by variability of interest
rate charged to borrowers
is also given to small businesses to purchase premises
take short term deposits from their customers and lend short term loans and
th of their total funds is kept in cash or relatively liquid form
principal lenders in housing market
function is to provide short tem finance by discounting bills of exchange
they have extended their activities to include govt. treasury bills, local
authority bonds and certificates of deposit.
were originally merchants who developed lending businesses
are extensive include:
advice on export financing, foreign
dealing corporate financial planning, leasing
hire purchase etc.
also arranges venture and development
capital for small
of overseas banks
with commercial banks in provision with short-medium-term finance-
Particularly for overseas trade and
mainly in hire purchase and lease financing
term depositers provide most of funds
over medium term, risk adjusted on charges
and invoice discounting companies:
Ø Individual companies( subsidiaries of
commercial banks) provide short term finance by purchasing business debts
Ø Factoring companies also offer debtor’s ledger
management as an additional charge
Ø Majority are subsidiaries of
commercial banks, merchant banks, finance houses
Ø Some are independent in finance and leasing association
Ø They specialize in lease finance