Business Finance: Funding Startups & Growth

Posted on Mar 9, 2025 in Economy

Money in businesses is needed for: starting up a business (the finance needed to pay all the essential fixed and current assets before it can begin trading), expanding a business, and supporting a business in difficulties (it might need to pay for new machinery to become more efficient, and a firm with negative cash flow may need to cover short-term expenses).

Revenue Expenditure

Revenue expenditure is money spent on day-to-day expenses that don’t involve the purchase of long-term assets.

Capital Expenditure

Capital expenditure is money spent on fixed assets that will last for more than one year. These are needed to start a business and to expand it.

Sources of Finance

Internal Finance

Internal finance is money obtained from within the business itself.

  • Retained Profit: The profit kept in the business after the owners have taken their share. Advantages: It doesn’t have to be repaid. Disadvantages: A new business won’t have retained profit, and many small firms could find that their profits are too low to finance needed expansion.
  • Sale of Existing Assets: Assets that are no longer required by the business, such as redundant buildings or surplus equipment. Advantages: Better use of capital. Disadvantages: It might take some time to sell the assets.
  • Running Down Stock: Reducing inventory levels to raise cash. Advantages: Reduces opportunity cost and storage cost. Disadvantages: Must be done carefully to avoid disappointing customers.
  • Owner’s Savings: A sole trader or members of a partnership can put more savings into their unincorporated business. Advantages: Should be available quickly, and no interest is paid. Disadvantages: Savings may be too low, and it increases the risk for the owners.

External Finance

External finance is money obtained from individuals or institutions outside of the business.

  • Issue of Shares: Only possible for limited companies. Advantages: A permanent source of capital that doesn’t have to be repaid. Disadvantages: Dividends are expected, and ownership could change hands.
  • Bank Loans: Borrowing money from the bank. Advantages: Usually quick to arrange and can be for varying lengths of time. Disadvantages: Must be repaid, and interest must be paid.
  • Selling Debentures: Long-term loan certificates issued by limited companies. Advantages: Can be used to raise very long-term finance (e.g., 25 years). Disadvantages: Must be repaid, and interest must be paid.
  • Factoring Debts: Debt factors are specialist agencies that “buy” the debts of firms for immediate cash. They may offer 90% of an existing debt; the debtor will then pay the factor, and the 10% represents the factor’s profit. Advantages: Immediate cash is available, and the risk of collection is transferred. Disadvantages: The firm doesn’t receive 100% of the value of its debts.
  • Grants and Subsidies: From outside agencies, including the government. Advantages: Usually don’t have to be repaid. Disadvantages: Often given with “strings attached” (e.g., location restrictions).