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Sources of finance Screenshot 2022-12-15 at 11.22.40 AM - Coggle Diagram
Sources of finance 
Internal Sources
Retained profit
This is the profits of a company that is kept, after payment of tax and dividends to its shareholders, to use on capital expenditure or kept in a contingency fund, incase of emergencies. This source is the most suitable for companies or for profit social enterprises as profit is reinvested back into company and not personal profit. This can be a long term source of profit as long as the business keeps making profit.
Advantages:
A company that's using this strategy on growth may pay low or no dividends because it makes more sense to invest in building and improving the business
The idea is that everyone (including shareholders) will benefit from increased profits in the long run.
Disadvantages:
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Shareholders often prefer to receive higher dividends rather than see the money reinvested to increase stock value. This will make the company less attractive to investors.
The sale of assets
Existing businesses can sell their unused assets, such as old equipment when new ones arrive. Or, when business relocates they can sell old land and buildings. This is suitable for any type of business as the sold assets don't have to be anything huge just old and unused. This source of finance is short term as money from sold objects can be spent quickly and its not much
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Disadvantages:
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The seller loses out on the tax benefits available to them through the lifetime capital gains exemption.
Personal funds
This is when an entrepreneur uses personal savings and usually used to finance business startups. This source of finance is most suitable for soletraders as their source of capital because it is suitable for small businesses and not be able to support larger businesses, and it is a short term source until business rises and starts earning profit.
Advantages:
You will know exactly how much money is available to run your business and you will not have to spend time trying to search for funding from investors or banks.
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External Sources
Trade Credit is when a creditor (an organization that offers trade credits), allows other businesses to postpone payments so that the buyer can pay at a later date. The time frame for payments is between within seven, 30, 60, 90, or 120 days, which is a short-medium time stamp. Which is most suitable for a company because companies have unlimited liability, so if you can't pay back the debt it doesn't take from your personal money, but the companies.
Advantages:
competitive advantage: sellers offering trade credit will have a competitive advantage because buyers often prefer sellers who can allow them paying later.
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Disadvantages
cash flow complications: allowing buyers to pay later means that sellers will have a hole in the companies' cash flow as they won't have a solid source of money right away
possibility of bad debts: some buyers don't pay their debts, and employees must take time collecting debts and calling late payers, and sometimes write off the unreceived payments and just take a loss
Crowdfunding is a way of raising money by collecting money from a large number of individuals for a small amount of money. Crowdfunding can also be done by donation funding, which doesn't require you to service the individual for the sum of money. It is recommended that the crowdfunding be made for only 30-45 days, which is a short timestamp. It is also most suitable for sole traders because it's a low-risk strategy that doesn't require a lot of money and can gain a solid amount of money over this period
Advantages:
Low overall risk: crowdfunding campaigns have a low overall financial risk because you can basically gain money without having to repay it as opposed to a loan, and it contains a huge financial boost especially when you're starting the business.
Increased Exposure: Startups that don't have a large marketing relationship usually start crowdfunding campaigns to gain popularity and money at the same time.
Disadvantages:
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long planning time: A lot of preparation goes into a successful crowdfunding campaign. It also needs videos, advertisements, explanations, contribution tiers, and rewards to plan out and produce. Even after preparing all of this, its success rate is low
Share capital
It is the money raised from selling shares in a limited liability company. However for publicly held companies this comes from its IPO. This source is most suitable for limited liability companies. This is a Long term source as selling shares will provide high amount of capital.
Advantages:
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Share capital is a source of permanent capital (Shareholders cannot refund their shares. Instead, if they want to sell their shares, they must find someone else to sell them to other than the company.
Disadvantages:
The business is vulnerable to takeover (As a business grows and sells more shares, it becomes vulnerable to the threat of a takeover.)
It dilutes and weakens control for the founders (The more shares that are issued, the more shareholders there are who own part of the business.)
Leasing is when a company makes an agreement with a leasing company to finance a particular asset in your company in return for a monthly subscription. Leasing usually lasts starting from 12 months or more, making it a long-term time stamp. Leasing is most suitable for sole traders because if you don't have the full cost to pay for a specific asset, leasing the assets will benefit your company greatly and reduce costs.
Advantages:
Leasing is much cheaper than a business loan, and much more simple than a loan, if you don't pay back your loan, an interest fee is added. However, leasing offers a very straightforward and much cheaper monthly fee.
When leasing you can take 100% financing. Unlike a bank loan, you do not have to use your own funds to use the asset. So there is less pressure on your liquidity position.
Disadvantages:
No ownership: Leasing doesn't allow you to own the asset, meaning if you cancel the lease agreement, the asset belongs to the leasing company
No permission: you don't have control on your assets, meaning if you want to renovate your asset or upgrade it, you can't do it unless the leasing company agrees.
Loan Capital
This refers to the source of finance obtained from commercial lenders such as banks. There are interest charges are imposed and can be fixed or variable depending on the agreement. (Mortgages,Debentures and Business development loans). This is a medium-to-long term source and is most suitable for businesses in need of capital like soletraders or companies in need.
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Disadvantages:
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Loan capital is not a solution for long-term business plans or for a project that needs higher investment capital with a longer repayment period.
Overdrafts
They are a financial service that allows a business to temporarily overdraw on its bank account. This is used when a business has a minor cash flow problems. They are a short term source and are suitable for businesses with cash flow problems so most likely soletraders.
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Disadvantages:
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If you have to extend your overdraft, you usually have to pay an arrangement fee.
Microfinance is basically a banking service to low-income individuals or owners of small businesses, and it allows them access to banking and insurance. Microfinance providers are a long term and sustainable source of finance, it is also most suitable for sole traders.
Advantages:
Accessibility: Microfinance providers allows low income individuals to become financially independent.
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Disadvantages:
limited finance: microfinance providers only offer small amounts of money because of the high risk of failure
limited eligibility: microfinance providers don't qualify all their individuals because it might be too risky, so not every poor person has the ability for microfinance.
Business angels: wealthy people who invest in high-risk business companies, and they even provide their funding. The timestamp for business angels can be either short or long-term. This source of finance is very beneficial to sole traders and startups because since they don't have much funding, the business angel will fund them.
Advantages:
Abundance of experience: Business angels have a lot of experience and can aid the owner not just in money, but also in experience.
Financial backing: The main purpose of the business angel is to provide funding to the owners, which makes the owner forget about finances since the business angel takes over and funds mostly everything, which increases the survival and success of the new company
Disadvantages
Loss of control: the owner of the business loses some control to the business angel since the business angel takes the proactive role
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