Time to Finance

Short-Term (ST) financing

Financing for one year or less

Sources of Finance

Medium-Term (MT) Financing

Financing for one to five years

Prepared by

Prof. Md. Mizanur Rahman

Long-Term (LT) Financing

(PhD, MBA)

Financing for over 5 years

Department of Marketing
Dhaka University
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Sources of finance

Internal Sources of Finance

Sources of finance are classed as being either

internal or external.

Six major internal sources of finance:

Owners

Internal sources:

finance from within

the business.

External sources:

finance from outside

the business.

Capital (equity capital)

Retained Earnings (equity capital)

Provident Fund of Staffs

Outstanding Expense (Accruals)

Sale of Assets

Debt Collection

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Internal Sources: Owners Capital

Advantages

Fund comes from

owners own
savings
This is a LT fund

Internal Sources: Owners Capital

Easy to access
No money to pay back
No interest to pay

This fund varies with the types of business

Limited fund is collected from owners

Disadvantages

Sole proprietorship
Partnership
Fund is collected by all or few partners

Risk of losing all

savings
Limited fund

Private and Public Ltd. Company

Entrepreneurs fund is the only internal source of
LT fund at the initial stage

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Internal Sources: Retained Earnings

Part of profit which is invested in business

Three forms of retained earnings

General Reserve

Dividend Equalization Fund

Internal Sources: Retained Earnings

Advantages

Profit is retained to invest for business expansion

A part of profit is reserved in this fund to keep
consistency of dividend payment

Sinking Fund

This source is only

available for a
business operating for
more than one year
This is a MT and LT
source of finance

Fund is created by keeping a part of money aside for

making payment of LT loan installment

No money to pay back

No interest to pay
right away
Reserve reduced

Disadvantages
No access for new
firm
Limited fund

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Internal Sources: Provident Fund of

Staffs

This fund is created

from the salaries of
staff and paid when
they get retired
When firm needs
money firm can use it
as a source of finance

Internal Sources: Accruals

Advantages

Advantages

No interest to pay

Disadvantages
No access for new
firm
Limited fund

Outstanding
expenses not met in
time can be used as
an internal source of
finance

Easy to get fund,

no interest to pay

Disadvantages

No access for new

firm, limited fund,
fairness
questionable

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Internal Sources: Sale of Assets

A MT source of finance
comes in from selling
off fixed assets that are
no longer needed

Advantages

There is a limit to the

number of fixed assets
a firm can sell off

Disadvantages

A double edged sword

reduced capacity!!

Good way to raise

finance, no money to
pay back

Unlikely to have
surplus assets to sell
Can be a slow method
of raising finance

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Internal Sources: Debt Collection

A business can raise

finance by collecting
debts from their
debtors

Advantages

Not all businesses have

debtors

Disadvantages

This is a ST source of
finance

No additional cost, a
part of the businesses
normal operations
There is a risk that
debts owed can go
bad and not be repaid

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External Sources of Finance

Major

external sources of finance:

Bank Loan

Hire Purchase

Overdraft

Mortgage

Trade Credit

Government Grants

Venture Capitalists

Business Angles

Other Sources

Other Types of Bank

Loans

Additional Partners

Share Issue

Leasing

Advantages

Money is borrowed
from a bank at an
agreed interest rate
over a period of time
and is paid back in
instalments.

External Sources: Bank Loan

Disadvantages
Can be expensive due
to interest payments
Bank may require
security on the loan
Only ST financing

This is a M-T and L-T

source of finance

Set repayments are

spread over a period
of time

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External Sources: Bank Overdraft

Advantages

Taking more money out

of your bank account
than you have in it.

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External Sources: Other Types of Bank

Loans

The overdraft is
flexible
Used on a day-to-day
basis to cover the
cash needs

Interest is charged for

every day you are
overdrawn.

Disadvantages

Pre-arranged with a
banking/lending
institution

Expensive with high

interest rates

Line of Credit an informal arrangement where a

bank extends a maximum amount of unsecured
credit to a borrower for a specified time period

Revolving Credit a formal commitment by the

bank to extend a maximum amount of credit
where the borrower pays a fee for any unused
portion of the credit
Single Loan a loan whose principal is due in total
with a single payment at maturity

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External Sources: Share Issue

External Sources: Additional Partners

A source of finance
suitable for a
partnership
business

Advantages

The new partner/s

can provide extra
capital

Disadvantages

Doesnt have to be repaid

No interest is payable

Diluting control of the

partnership

Less amount of profits

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A L-T source of
finance suitable
for a limited
company
Involves issuing
new stock to
public or right/
bonus stock to
existing
stockholders

Advantages

Never repaid

Large sum available

No interest is payable

Disadvantages

Profits will be paid out as

dividends to more
shareholders

Only for publics for new

issues and loss of control
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External Sources: Leasing

An arrangement with Advantages

a firm to obtain
Use of up-to-date
equipment immediately
assets without
paying a large lump
Payments are spread
sum up front
over a period of time
Leasing is like
renting an asset

External Sources: Hire Purchase

Disadvantages

A MT source of
finance

Can be expensive

The asset belongs to the

finance company

Advantages

Involves paying an
initial deposit and
regular payments for a
set period of time
After all repayments
have been made the
business owns the
asset

Use of up-to-date
equipment immediately

Payments are spread

over a period of time

Once all repayments are

made the business will
own the asset

Disadvantages

A MT source of
finance

Expensive financing

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External Sources: Trade Credit

External Sources: Mortgage

A loan secured on
property repaid in
instalments over a
period of time
typically 25 years

Advantages

Advantages
Use of up-to-date
equipment
Payments are spread over
a period of time
After all repayments, the
business will own the asset

The business will own

the property once the
Disadvantages
final payment has
Expensive financing
been made
A long-term source of
finance

Trade credit is
summed up by the
phrase: buy now
pay later

Easy financing
Good for CF
No interest charged if money
is paid within agreed time

Typical trade credit

Disadvantages
period is 30 days

More costly if discount is not

taken
Sometimes difficult to pay
debt in time

If business fails
repayments, the property
could be repossessed

This is a S-T
source of finance

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External Sources: Government Grants

Government
organisations offer
grants to
businesses, both
established and new
Usually certain
conditions apply,
such as where the
business has to
locate

Advantages

External Sources: Venture Capitalists

Dont have to be
repaid

Disadvantages

Wealthy, professional
investors invest in
start-up businesses
Look for investment
opportunities in fast
growing businesses

Certain conditions
may apply e.g.
location

Not all businesses

may be eligible for a
grant
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May provide advice,

contacts and experience

Advantages

Large amount may

be available
Provide advice,
experience, &
contacts

Disadvantages

Owner may lose

some control over
business
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External Sources: Business Angles

Wealthy individual investors, who dont

operate a business and look for personal
investment opportunities, invest in earlystage companies in return for a portion of the
firms equity
Could be an individual or a small group

External Sources: Other Sources

Generally have some say in the running of the

company

Commercial Papers ST, unsecured notes issued in

bearer form by reputed firms with maturity of 1270 days
Bankers Acceptance A negotiable money market
instrument drawn on and accepted by a bank
Treasury Bills A short-dated government security
issued at a risk-free interest rate
Debentures (Corporate Bonds) Issued by a
company to raise money with a fixed interest rate

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Factors affecting the choice of

funding
Advice
available

The amount
required

The Secrets to Successful Financing

The cost of
the money

The length of time for

which the money is
needed

1. Choosing the right sources will influence a

company for a lifetime.
2. The money is out there; the key is knowing
where to look.

Choosing a
funding method
Loss of
control

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3. Raising money takes time and effort.

The risk
involved

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4. Creativity counts (creative in searching capital

and developing business ideas.

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The Secrets to Successful Financing

5. The WWW puts at entrepreneurs fingertips all
information that can lead to financing.
6. Be thoroughly prepared before approaching
lenders and investors.
7. Dont underestimate the importance of making
sure that the chemistry among themselves,
their companies, and their funding sources is a
good one.
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