Suitability of the different sources of finance
Different sources of finance are suited to different business contexts, for example, start-up businesses, businesses experiencing cash flow issues, and expanding businesses.
Start-up business
Start-up businesses are most suited to the following types of finance:
- owner’s capital – owners are likely to use their own money to start the business
- family and friends – often provide new business owners with finances
- a bank loan – could be difficult to get, but is possible with a detailed business plan
- venture capital and business angels – may be willing to take the risk on a new business
- trade credit – can be used to help a start-up business spread its costs
- leasing and hire purchase – are both used by new businesses to spread costs on equipment it otherwise may not be able to afford
- government grants – may be used if a business fits the criteria
Cash flow issues
Businesses with cash flow issues are most suited to the following types of finance:
- owner’s capital – owners are likely to use their own money to cover some of the debts
- family and friends – may help out in difficult financial times
- bank loan – could be difficult to get, but is possible with a detailed business plan
- overdraft – this will allow the business to gain some temporary finances
- share issue – this could be used to sell off part of the business to raise finance
- trade credit – can be used to help delay some business costs
- selling assets – may be used as a last resort to gain money
Expansion
A growing business is most suited to the following types of finance:
- retained profit – an expanding business will likely have some spare profit they can use to invest
- bank loan – could be used to provide money to grow the business
- venture capitalists and business angels – they will look for opportunities to invest in growing businesses to help maximise their financial returns
- share issue – this could be used to sell off part of the business to raise finance
- new partners – a business may invite new partners to invest and help them grow the business
