Factors Affecting Sources of Finance
Business: Edexcel IGCSE, topic 3.1.2
Factors Affecting Best Sources and Methods of Financing
Lots of different factors affect what is the best source of financing for a business:
New vs established business
- A company’s size and track record can affect the availability and cost of finance.
- New businesses are likely to find it harder to get loans from a bank but can take advantage of hire purchases and trade credit.
- Established companies are also much more likely to be larger and therefore require larger investments.
- External sources of finance are preferred when the size of the investment is large as internal sources of finance are often limited.
Financial situation
- Whether a business is in a good financial situation can impact the availability and cost of finance.
- A business that is struggling may not be able to get loans as it is much more likely that they won’t pay them back. Even if they are able to get loans, these loans will have much higher interest payments.
- A business that is struggling is also less likely to be able to use internal sources of finance.
Long-term vs short-term
- The length of time that finance is needed for affects which type of finance is best.
- Trade credits are an example of short-term finance. A supplier is likely to only give the business an extension of a few days or weeks.
- Bank loans and mortgages are a long term source of finance and may only be paid back in full after 20 years.
Cost
- External financing tends to be more expensive because a business normally has to pay interest on external financing.
Test yourself on Factors Affecting Sources of Finance
How do struggling businesses source finance?
Which of the following is a short-term source of finance?
I'm setting up a new business selling toothbrushes for animals. Which source of finance am I likely to struggle to get?
Which of the following businesses will find it easiest to source finance?