Sources of Finance for Large Businesses

Internal Sources of Finance

• Large businesses usually have retained profits which they can reinvest back into the business. Retained profits are earnings that a company has made but not yet paid out in dividends.

• Another internal source of finance is sale of assets. Businesses can sell property, machinery, or other assets to raise money.

• Debt collection is another approach. Large businesses often have outstanding invoices. Speeding up the collection of these debts can free up cash.

External Sources of Finance

• Large businesses can explore share capital as a major external source of funding. This involves the selling of the business's shares to institutional or private investors.

• Loans and mortgages from banks or other financial institutions are also common sources of external finance. These usually come with interest rates and require regular repayments.

• Large businesses can also consider leasing, where they can access expensive assets such as machinery or vehicles without having to purchase them outright.

• Issuing bonds is another way to raise capital. A bond is an agreement where the business borrows money from investors and promises to repay it, with interest, over a specified period.

Grants and Funding

• Some large businesses may be eligible for government grants, although this can be competitive. Grants are non-repayable funds provided by government departments or agencies to assist businesses.

• European Union (EU) funding may be available to large businesses within member countries. These funds may require the businesses to operate within certain guidelines.

Advantages and Disadvantages of Sources of Finance

• Each source of finance comes with its own set of advantages and disadvantages. For example, retained profits do not need to be repaid and don't involve loss of control, but using them may limit the amount of dividends that can be paid out.

• Loans provide large sums of money, but lenders will expect regular repayments with interest. Additionally, some may require collateral.

• While issuing shares can raise substantial capital, it also dilutes the owners' control over the business.

• Understanding the implications of each source is key to making the most informed decisions about finance.

Choice of Finance

• The choice of finance depends on a variety of factors, including cost of finance, amount needed, business situation, and availability.

• It is crucial for businesses to weigh up the benefits and drawbacks of each source of finance before making a choice that aligns best with their strategic objectives.

Knowledge of different sources of finance that large businesses can access is crucial, as it informs decisions about growth, investments, and how to respond to financial challenges. Just as important as knowing the sources themselves is understanding the implications of each, in terms of costs, risks, control, and commitment.